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Robo-Advisors: What to Know About Digital Investing

Robo-advisors, or digital investment advice, offer investors automated, algorithm-based portfolio management with minimal intervention since the platform utilizes technology rather than active management by a traditional financial planner. Robo-advisors provide a simple, intelligent investing option for all investors, whether you’ve been building your wealth for decades or just getting started.

Key Takeaways:

  • By filling out a questionnaire about your age, risk tolerance, and goals, the platform will generate a recommended asset allocation.
  • Robo-advisors usually have significantly lower account minimums and assets-under-management fees are typically half those of fully managed accounts.
  • It may be beneficial to use a robo-advisor and a fully managed account; you don’t have to choose one or the other.

For those who may be skeptical of an automated approach to wealth management, consider this: 73% of people who use automated investing as their primary service said they are satisfied or very satisfied with their robo-advisor, according to a 2016 study conducted by Investopedia.

How robo-advisors work

When you open an account, you’ll be prompted to answer a series of questions to help the platform understand your age, risk tolerance, and goals. Based on your answers, the platform generates an asset allocation recommendation.

As SigFig¹ — a robo-advising provider — explains, robo-advisors don’t typically trade stocks, but invest in low-cost exchange-traded funds (ETFs).

After you set up an account, your portfolio is continuously monitored and rebalanced based on your tolerance for risk and other factors. Some robo-advisors provide access to a professional if you would like a periodic review of your portfolio or seek advice on your financial plan; other robo-advisors are fully automated and do not offer access to a financial planner. Each digital investing service has different offerings, so be sure to research the specifics of the platform you choose.

Benefits of robo-advisors

Automated investing offers a number of benefits:

  1. Affordability: One of the biggest differences between a robo-advisor and a traditionally managed account is the significantly lower minimums required to open an account. Most financial planners require anywhere from $50,000 to $100,000 in investable assets to open an account, while robo-advisors are usually in the low four-digit range. In addition, robo-advisors have lower fees — traditional financial planners usually charge 1%-2% of your managed assets, while robo-advisors charge roughly half that.
  2. Convenience: As a digital-first investing option, robo-advisors allow you to sign up and access your portfolio quickly online rather than wait for an appointment with your consultant.
  3. Simplicity: By answering a simple set of questions, digital investing platforms provide a comprehensive investment portfolio instantaneously. Should you choose to change your investment objectives, you can alter your risk tolerance, prompting your robo-advisor to modify your portfolio accordingly.

Financial planner, digital, or both?

Investors don’t have to choose between the traditional approach and digital platform; you can use both. In fact, the Investopedia study found that people are happy using both options as part of their portfolio. You can choose to use only the robo-advisor platform for your portfolio, or it can be a piece of your overall investment strategy alongside your traditionally managed accounts.

The bottom line

Robo-advisors can be useful for any type of investor. It can appeal to a 50-year-old looking to invest $15,000 rather than store it in a savings account like a certificate of deposit (CD); it also helps the younger investor who is eager to start their long-term retirement nest egg through a professionally-managed portfolio at a lower cost. It can even benefit older investors who are trying to grow or stretch retirement funds by reducing their management fees. Consider your goals and needs before you decide if going the robo route is right for you.

Remember that investing involves risk, including the risk of loss. There can be no assurance that investment objectives will be achieved.

More information

Investing is an important part of your future, whether you’re planning for retirement or other future goals. To learn how we can help you achieve the retirement you want, schedule a Citizens Retirement Checkup at your nearest Citizens Bank branch.

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