A Guide to Robo-Advisors
Updated Jul 27, 2023
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For decades, people have been turning to advisors and investment firms for financial advice on how best to grow their wealth. However, not everyone can afford the services of a personal advisor or large investment company. Fortunately, the times have changed dramatically, and the introduction of robo-advisors has helped democratize and simplify savings, investment, and retirement plans.
In today’s guide, we will talk about what exactly a robo-advisors does, the benefits and drawbacks of using one, and our professional recommendations for seniors considering a robo-advisor.
A robo-advisor is a service that provides financial vehicles, advice, and money management solutions with little to no human involvement. Rather than having a financial advisor manage your accounts, you allow a digital service or program to do the same using different algorithms. Since most human financial advisors use mathematical formulas and predictive models in their own advisement services, you’re essentially getting the same thing by using an online robo-advisor.
Pro Tip: Robo-advisors can help you invest and match market gains without having to manually invest or rely on an expensive financial advisor.
Like traditional advisors, robo-advisors offer varied services and features. Most robo-advisors include some or all of the following:
Robo-advisors can be a fast and relatively simple way to manage and grow your money based on your personal goals.
Like traditional advisors, there are various advantages and disadvantages related to robo-advisors.
Robo-advisors are frequently marketed to younger investors who don’t have as much experience or investment knowledge. But there’s no age cap on who can benefit from a robo-advisor. It all depends on your personal needs and goals. Generally, robo-advisors are best for people who want a simple, low-cost way to manage and invest their money.
If you’re in the market to change banking institutions or financial advisors, you should consider a robo-advisor for the lower costs alone. Additionally, if you want access to educational resources to help you learn more about managing your money, many robo-advisors offer great solutions. Finally, if your financial goals are pretty straightforward (save for retirement, reduce tax burden, diversify assets, etc.), then a robo-advisor can be a perfect fit.
Pro Tip: Older adults who prefer the “set it and forget it” approach to investing will likely benefit from a robo-advisor.
That said, robo-advisors are not for everyone. If you feel intimidated by using apps or computer programs to manage your money, you might prefer more traditional banking methods. Additionally, if you like to speak directly with a person when dealing with money issues or getting financial guidance, then robo-advisors won’t be the best fit for you. Lastly, if you have highly specific financial goals, most robo-advisors may not be equipped to help you the way you want to be helped.
The average annual management fee for a robo-advisor usually lies somewhere between 0.25 percent and 0.50 percent of your managed funds. However, robo-advisors vary in their fee structures. Some charge a monthly subscription fee that can be anywhere between $3 and $20 per month. Fortunately, most robo-advisors have smaller fees, as this is one of their main selling points. In some cases, robo-advisors charge no fees and instead make money by offering affiliated financial services through third-party providers.
Pro Tip: Robo-advisors are usually less expensive than personal financial advisors, but you should always read the fine print before putting your savings into a new account.
It’s important to remember that some robo-advisors require you to have a minimum balance to maintain your accounts. Again, any minimum balance requirements tend to be on the lower side, as robo-advisors often want to target younger investors who may not have a lot of capital on hand. Thus, plenty of robo-advisors forego minimum balances entirely. There are some providers that demand a minimum balance of anywhere from $25 to $5,000. Certain providers are specifically designed for retirees or people who have accumulated larger nest eggs. This means that they require much larger sums to access the full features of the service.
If you decide that a robo-advisor might be the best option for you, there are a few things that you should consider before making your choice:
Now that you know a bit more about what robo-advisors can do, it’s time to look at a few of our top recommendations. We found that these advisors are particularly beneficial for seniors and those approaching retirement.
Betterment is an app for general cash management, guided investing, and retirement planning.
Best for: Seniors who want low fees and a wide range of account options
Wealthfront is a popular automated investment portfolio service focused on long-term savings and retirement plans.
Best for: Older adults who want low fees and automated features that require little manual interaction
Personal Capital is a digital investment management robo-advisor that works in tandem with personal financial advisors.
Best for: Seniors who want access to free digital investment services, with the opportunity to combine robo-advisors and traditional financial advisors
SoFi is an automated investment service that focuses on financial guidance and portfolio management.
Best for: Those who want simple automated investment help and retirement planning with optional cash management services
Any investment portfolio stands the risk of losing money; portfolios managed by robo-advisors are no exception. That said, robo-advisors use algorithms to help reduce the risk of loss and increase the chances of gain, particularly if you can keep your funds invested for the long term.
Robo-investing is the use of a company or service that utilizes algorithms to help you manage your investments and meet your financial goals. Generally, robo-investing allows you to invest with lower fees and far less human intervention.
Over the past few years, SoFi Automated Investing has recorded some of the best average ROIs for its account holders. However, it’s important to note that robo-advisors often replace each other as the “best” option from one year to the next. Therefore, you shouldn’t be overly concerned unless a robo-advisor consistently performs poorly.
Most robo-advisors focus on index fund strategies for investing. This means that your returns with a robo-advisor will usually match the market but rarely (if ever) beat the market. Only robo-advisors that use unique strategies that distinguish themselves from broader indexes have the chance to outperform the market.