Should You Use A Robo-Advisor? 9 Questions To Ask Yourself
Robo-advisors are almost in the mainstream and they’re currently being marketed very heavily. That said, robo-advisors are not for everyone and if you’re considering using one, we’ve prepared a handy list of 9 questions to ask yourself before going robo. If you answered ‘Yes’ to all these questions, then go right ahead! Check out our robo-advisor reviews for information on how to choose the best robo-advisor for you.
Am I eligible to use a robo-advisor?
At this point in time, robo-advisors are still very US-centric. Hence, they all require that you have a US Social Security number or US Tax ID number and reside at a permanent US mailing address in order to open an account with them.
Do I think that it would be extremely difficult for me to beat the market?
If you fancy yourself being able to beat the market through careful stock picking a la Warren Buffett, then a robo-advisor is not for you. Robo-advisory algorithms are based on Modern Portfolio Theory, which states a broadly diversified investment portfolio gives the highest level of return for the lowest level of risk.
Do I want a broadly diversified investment portfolio?
In line with the question above, all robo-advisors will create for you a diversified investment portfolio. They do this by investing in ETFs, meaning that you will not be able to select individual stocks or bonds in your portfolio.
Am I investing for the long term?
If you are investing for short-term gain, you shouldn’t use a robo-advisor. Even the shortest time horizons that robo-advisors recommend in their goal setting features are typically still more than 5 years.
Do I want to spend a minimal amount of time in managing my investments?
Convenience is one of the major selling points of robo-advisors. If you don’t want to spend a lot of time managing your portfolio, then a robo-advisor would be a great fit for you.
Am I okay with not receiving personalized investment advice?
Unlike personal financial advisors, you will not be receiving any personalized advice. Sure, robo-advisors will allow you to set some financial goals based on your risk tolerance, but it is not the same thing. If you are okay with this, then go ahead and consider a robo-advisor.
Am I comfortable with my money being entirely managed by algorithms?
They’re called robo-advisors for a reason; your portfolio will be managed by software algorithms, and in most cases there won’t be any humans looking over each trade. Some people may not be
comfortable with that; but if you are, then great!
If my investments drop significantly in value in a certain period, am I comfortable in waiting it out?
This goes hand-in-hand with the investment time horizon question above as well as the algorithm question. In periods of market distress, you must be willing to ‘ride it out’ with a long term outlook in mind. Further, the algorithm would likely still keep you at your previous allocation even during such periods.
Are low fees in managing my investment portfolio a major priority?
Another major draw of robo-advisors is the low fees compared to traditional financial advisors. Most robo-advisors have management fees in the 0.25% – 0.50% range with many even lower than that. If low management fees are a major priority for you, then you should consider a robo-advisor.