Should you be using a robo-advisor?

Jul 25, 2023
Amy Arnott, portfolio strategist at Morningstar, helps you make the decision.

Robo-advisors use computer algorithms to provide low-cost asset allocation and build automated portfolios for individual investors.

As a rule of thumb, robo-advisors steer younger clients toward more stock-heavy portfolios while matching up older investors (or those who need their money in a shorter time frame) with portfolios heavier in bonds and other less volatile assets.

But digital investment advice is not the best fit for everyone.

Here’s how to decide if this type of financial advice makes sense for you.

First cover the basics.

The first order of business is to set up an Emergency Fund. It’s best to have at least six months’ of living expenses set aside to cover unexpected costs, such as car repairs, medical expenses, or a sudden job loss. These funds should be in safe, highly liquid assets that you can easily tap into on short notice if needed.

If you have dependents, put a term insurance plan in place. And get medical insurance for all family members.

These steps are a critical foundation for financial success.

Take a look at your situation.

Financial advisers may want individuals with a particular sum of investible assets. So they may be out of reach for those who probably need it most. Robo-advisors can help fill the gap for investors who do not have much money to invest.

Complexity is a related issue. For the most part, investors with fewer assets have more straightforward financial needs, while those with higher levels of wealth have more complex planning needs.

Investors with larger portfolios can often benefit from comprehensive financial planning, including investment management, insurance and risk management, estate planning, advice on stock-based compensation programmes, retirement drawdown strategies, and tactics for minimizing tax liabilities over time. A qualified financial advisor can often help wealthier individuals sort through these issues.

Depends on the number of goals too. Retirement, child’s education, global holidays, buying a home – all these multiple goals compete for attention and investments. Such an individual will benefit from working with a financial planner.

What is your comfort level?

Do you feel confident managing your own investments and financial planning? Do you have the time and inclination to do so?

Investing doesn’t have to be complicated. The basic principles: Start early and invest for the long term, avoid market-timing, keep costs low, diversify your portfolio, match your portfolio’s risk level with your willingness and ability to take risk, don’t panic when the market goes down, and try to avoid making stupid mistakes, such as buying highly specialized funds in speculative areas. In fact, investors often fare better by sticking with a handful of broadly diversified funds rather than trying to put together ultra-complicated portfolios that incorporate every conceivable asset class.

That said, all of this is easier said than done. Some people enjoy spending time managing their investments and taking control over their financial lives, but others find the process intimidating. (I once met a computer programmer with a doctorate in math who commented that investing was “way too complicated.”) If you feel more comfortable with someone else making the decisions, a traditional financial adviser may be a better way to go.

  • Do you prefer to talk through financial issues with an actual human being?
  • Do you tend to panic or need a lot of reassurance?
  • Do you want to understand the rationale behind how your finances are set up and have detailed discussions on it?
  • Do you want to develop a relationship with the individual who is managing your finances and want to have the option of in-person meetings or phone calls?

Then you will be better off going the traditional route and opting for a human adviser.

Robo-advisors can be good options, but they aren’t for everyone.

Sound investing, withdrawals, and holistic financial planning are as much art as science. In that sense, there will always be a role for traditional advisers, especially with clients whose needs are complicated. Newer and less wealthy investors—who often have limited access to financial advice at a reasonable price—now have options for getting started through robo-advisors.

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