The Nuts And Bolts of Robo Advisors: What They Are, How They Work & When You Might Want to Use One
April 5th, 2017 | Posted in Investing
All robo advisors have things in common, but not all are created equal.
What is a “Robo-Advisor,” Exactly?
As its name suggests, a “robo advisor” is an automated system that attempts to do what personal advisors do: manage your assets according to your goals, time horizon and tolerance for risk. Robo advisors generally have three things in common:
- Completely on-line: After you answer a few questions on the robo advisor’s web site, its software will recommend a portfolio for you. You don’t have to know anything about investing, and there’s no need to interact with a human if you don’t want to.
- Low fees: Robo advisors’ main advantage is that they keep fees low. They do this in a couple of ways. First, they generally invest only in exchange traded funds (ETFs, or “index funds”) that mimic entire asset classes, such as large cap stocks, small cap stocks, international stocks, etc. That way, they can utilize a range of asset classes and provide instant diversification, but don’t incur the costs of paying a fleet of analysts to manage a portfolio of hundreds of securities. And second, you’re not paying a human advisor — robots work for much less.
- Algorithm based:The robo advisor’s software decides how to invest your money according to an array of formulas and analytics, many of which are the same as human advisors use. Requiring very little human input, they are the epitome of “set it and forget it” investing.
Robo Advisor Pros and Cons
The technology behind robo advisors is cutting edge. But a closer look reveals several pros and cons.
Pros:
- Low fees: As mentioned, robo advisors typically charge much lower fees than human advisors. So more of your money stays invested rather than being paid out in fees. That can add up over time.
- Simplicity: It doesn’t get much simpler than filling out a form on-line and getting a portfolio recommendation!
- Automation: Because they automate investing, robo advisors can be great for younger investors who want to build wealth over time by investing a small amount regularly.
Cons:
- Limited flexibility: Most robos don’t stray from your initial asset allocation. If market or economic conditions change, they typically can’t adapt, so they aren’t as effective as human advisors at spotting opportunities or dangers.
- Limited scope: Robos can’t take into account other investing concerns, such as your tax situation or estate planning needs.
- Limited history: Robos are only as good as their programs — after all, they’re just software. And they’re relatively new, so they have no track record to speak of. In fact, none have experienced a bear market.
When Might You Want to Use One?
The pros and cons of robo advisors suggest the things they’re best at:
- Building wealth over time: Robo advisors are great for people who want to automate investing and add a little bit to their portfolio regularly.
- Making investing easy: Investing can be complicated and intimidating. Robo advisors make it easy to invest and not think about it. And if that gets you investing and saving for retirement sooner, that’s a good thing
- Diversify a larger portfolio: Robos can’t do tax planning or estate planning, but they can help manage your investment portfolio without adding a lot of fees. That way, you pay for advisory expertise where you need it most.
How Do Robo Advisors Differ?
While robo advisors are a relatively new concept, they’ve already begun to evolve. Most remain “black box” products that simply invest according to static programs. Zacks Advantage is in the vanguard of “hybrid robo advisors,” which seek to offer investors the pros of typical robo advisors — low fees and simplicity — and also retain the advantages of experienced, active management. A recent study suggests this could actually be the BEST way to invest.
In the case of Zacks Advantage by Zacks Investment Management, Zacks Advantage leverages the investing experience and expertise of Zacks Investment Management to actively manages the Zacks Advantage portfolios using analytic methods refined over 25 years advising billions of dollars of institutional and high net worth assets. So if market or economic conditions change, this active investing approach seeks to boost return potential or help limit losses.
For investors looking for ways to manage wealth they’ve already built, hybrid robo advisors like Zacks Advantage can be an excellent way to enjoy the benefits of active management while keeping fees low. To learn more, we invite you to explore our web site, or give us a call at 1-888-989-2257.
Learn more about how Zacks Advantage combines the simplicity and low fees of a robo advisor with performance-focused active management. Download our Overview Guide today!
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