Online Investment Advisor Services 101: How It Works, Pros and Cons
Nowadays, you don’t have to meet with someone in person in order to get some advice on how to handle your finances and investments. In this increasingly busy and chaotic world, who has time for an actual meeting? No one, as long as you can manage an investment strategy from the comfort of your own home. How, you ask? Well, by using an online investment advisor or an automated financial advisor, whatever you want to call it. Luckily, there are plenty of options out there, each promising exciting and reliable services.
If you are not familiar with the concept of an online investment advisor, but you would like to give it a shot, here is an overview on everything you need to know. We are going to talk about how the automated financial advisors work, and what are their pros and cons. We will also detail upon the main options that you can choose from.
How Does an Online Investment Advisor Work?
An online investment advisor is a type of service that helps you manage your financial and investment portfolio. Unlike traditional financial advisors, these services accomplish this by using algorithms and 100% automated tools. Because everything is automated, an online investment advisor, or a robo-advisor, can manage your investments much cheaper than an actual human advisor.
If you decide to invest your finances using an online investment advisor, you might get higher returns, since the fees are lower. Another advantage is that this service comes with features such as tax-loss harvesting or automatic rebalancing. To delve a little bit deeper into the subject, you should know that your portfolio will be rebalanced constantly. This way, so you can fully trust that your money is in good hands. Furthermore, the tax-loss harvesting feature is quite impressive. It allows you to sell securities that are at a loss and thus neutralize taxes related both to income and gains. Then, you can replace what you sold with a new security. This way, you can make sure your assets and returns are still optimal in the end.
What Do I Need to Know Before I Choose an Automated Financial Advisor?
Before deciding on an online investment advisor, there are several things that you should consider. Of course, the first concern is the cost of the service. Some companies charge nothing, while others (most of them) charge a small fee. Then, consider the type of account that you would like to open. All of them provide you with the options of a taxable account and an IRA retirement account. Still, only a few target self-employed people, offering the possibility of a SEP IRA account.
Then, would you like to invest in ETFs? If the answer is yes, you should know that you can do that with all online investment advisors. However, if you want more flexibility, you have to look for some specific ones. Moreover, not all of them offer the tax-loss harvesting service mentioned above. So, if you know you want that for sure, consider researching one that does. Finally, don’t forget to check if the online investment advisor you selected allows brokerages to keep your investments. If not, you will have to give your money to one of their personal custodians.
Before deciding to try out the so-called robo-advisors, think about whether you prefer a more personalized customer service or not. Even if the entire service is generally cheaper than hiring a traditional financial advisor, some people are reluctant. They tend to think the gains brought by it are not worth sacrificing personal interaction. That being said, let us now look at the pros and cons of online investment advisors.
Online Investment Advisors Pros and Cons
1. Low Fees
When it comes to investment assistance offered by a professional, the more traditional option had customers paying around 1.0% of all the assets that the advisor was managing. But now, since the robo-advisors have developed in the investment management services, customers only have to pay an usually low fee, depending on the company they choose. Regardless of the company, the fees are definitely lower than any traditional advisor would ask for.
2. A Lot of Different Options
Perhaps the greatest thing when it comes to online investment advisors is the fact that they are quite different from one another, which means that you get to choose the one that best fits your needs. There are so many investment sectors and themes that it is only natural that these services try to cover as many of them as possible.
3. Accessible to Everyone
If we’re being honest, most people who hire a professional financial advisor are already familiar with the concept and have enough wealth to afford it. This means that people who are young and barely starting their lives don’t really think this is an option for them too. While this might have been true with the common investment advisor, the robo-advisors make everything easier, allowing young people to have easy and usually cheap access to their services.
4. Also Easily Accessible Through a Personal Advisor
Even traditional financial advisors can see the appeal of these automated financial advisors, which is why they often recommend one to their clients. That is because this makes their job easier as well. The algorithms take care of choosing the assets, while the advisor simply focuses on spending one-on-one time with the customers. This is definitely a win-win situation, in which you as a customer can benefit from both an automated financial advisor and a human component for a more personal interaction.
5. Available with an Extremely Low Minimum Balance
Another great pro of an online investment advisor is that you don’t have to worry about having a high minimum balance. Some companies even allow you to have a zero balance to start with their services, while others only ask for $100 or $1.000. When it comes to the minimum balance, a higher one does not necessarily mean that the respective company should be avoided. In fact, you should weigh all the pros and cons of each option before making an informed decision.
6. Algorithms That Have Won the Nobel Prize
Yes, you heard that right, the algorithms used by some automated financial advisors have won the Nobel Prize for their effectiveness and functionality. For instance, Betterment relies a lot on the theories put forth by Robert Shiller and Eugene Fama and which have won this famous prize. Of course, all companies that specialize in robo-advisors aim to offer their customers a portfolio that has a high return and a low risk factor. That is why they rely so much on investment portfolio research theory when they develop their services.
1. Could Use More Personalization
Some online investment advisors have put a lot of thought into how to make your experience more pleasurable and included a human component. Still, when it comes to an automated financial advisor, it is clear that it won’t be as personalized as a traditional advisor. As much as your portfolio speaks about your finances, it doesn’t say much about your personal goals. A lot of people feel uncertain or have issues that they would like an actual person to address. Not every unique situation can be tackled by a robo-advisor.
2. High Fees in Certain Situations
Now, even if normally, an online investment advisor will charge you less than most human financial advisors, this is not always the case. There are situations where if you were to put things into perspective, a traditional advisor might be more suitable for you. One such situation is when you find a human advisor that charges less and you are more interested in the personal interaction than in the automated services. Another situation is when you only need advice for a short period of time, in which case you can pay an advisor per number of hours.
3. No Face-to-Face Interaction
Even if there are some automated financial advisors that include the human component, no online investment advisor offers face-to-face meetings with an actual person. Of course, you can get in touch with someone via phone, email, or even video conference in the case of some companies. Still, this is not the same as actually meeting someone and sitting across from them discussing your financial planning and concerns.
4. Not Necessarily the Best Option with Low Funds
When you don’t have that much money to begin with, an online investment advisor might not be the best option for you. That is, first of all, because some of them require an initial investment, which even if it is not very high, it can seem too high for some people. Second of all, if you are not so knowledgeable in the investment world, you will probably want to benefit from some personal coaching coming from an actual human advisor. In this case, you should know that there are advisors who offer free services if you fit certain standards, or some who you have to pay monthly, which might be more convenient for you.
Top Automated Financial Advisors to Choose From
One of the most well-known online investment advisors, Betterment is designed to help even people who are not investment-savvy. They are currently managing 93,000 accounts and around $2 billion. In order to manage your funds, they use an allocation system that is entirely automated and index funds that depend on the time period and on your tolerance to risky investments. Their fees are lower than other traditional financial management firms and brokerages, which definitely makes them a popular online investment advisor choice. You don’t have to worry about having a minimum deposit in order to open an account, but keep in mind that the fees that you have to pay depend on your account balance.
Wealthfront goes even beyond Betterment in what concerns the amount of money they are balancing, making it the largest electronic investment management service available to you. Its features are similar to those of Betterment, but there are some aspects that differ as well. For instance, you have to have at least $500 to open an account, and the management fee that they ask for is of 0.25% of all of your assets for accounts that go over the sum of $10.000. However, we have some good news for you as well. You will have to pay no account maintenance fees, no trading commissions, and no extra fees whatsoever.
Personal Capital aims to help you get some insight into how you usually spend your money and how you can keep your cash flow under closer observation. Whatever transactions you make they can turn into graphs that help you figure out more easily how to manage your funds. Then, the online financial advisor works to discover the best ways to increase your wealth. They create your own investment portfolio where you can sync all your accounts, and they provide you with access to their financial advisors via email, web conference, or phone.
TradeKing is one of the online investment advisors that really struggle to provide customers with both perks they need. These are the automated financial advising service, for more convenience, and also a more personalized experience of financial advice. They charge low fees in order to give everyone the chance to experiment with an online investment advisor. So, no matter the amount of wealth that they possess, everyone can try their hand. This company is similar both to Personal Capital and Betterment, in that it creates a personalized portfolio for its customers. This is done according to information you share about your future goals, possibilities, and tolerance to risks. Another interesting fact about TradeKing is that their algorithm has won a Nobel Prize as well.
Schwab Intelligent Portfolios
This company not only creates your financial portfolio, it also constantly rebalances it. This way, they make sure that your goals are still the most important thing to work towards. In order to get their services, you need a minimum of $5.000. Once you sign up, you can be sure that you are in good and professional hands. As with most robo-advisors, everything is automated, from investment selection to market studying. Moreover, if you manage to keep an account balance of at least $5.000, then both your overweight and underweight assets will be rebalanced automatically.
Vanguard Personal Advisor Services
The Vanguard Personal Advisor Services are well-known for combining the automated financial planning algorithms with a personal touch. This can help you deal with more personalized issues that are not covered by the robo-advisor. They have a low management fee compared to other similar services that also involve a human component. Such an alternative which is more expensive is, for instance, Personal Capital. At the same time, the Vanguard financial advisors are extremely dedicated and easy to reach. They are prepared to answer any questions you might have or any concerns you might address. However, we should mention that the initial investment is quite steep, namely a $50,000 account minimum. This means that people who don’t have that much money won’t be able to benefit from the Vanguard services.
Online Investment Advisor – Summing It All Up
The world of online investment advisors can be quite confusing and difficult to understand. This is especially so for people who are not investment-savvy but are still looking for the best way to manage their finances. The truth is that many people still doubt this type of service. The reason is mainly because they find it difficult to trust a robot to safely take care of their money. Not to mention advising them. Still, advice regarding best things to invest in and what to stay away from needs to be very factual. The amount of data a robo-advisor works with enables it to give you exquisite advice, therefore.
Even if online investment advisors have proven to be effective, they are still not as good as the traditional financial advisors. This is a fact mainly when it comes to unique issues that need to be addressed. You can minimize personal interaction and save time and money by having an online investment advisor take care of your finances. If this suits you, then you should definitely try one of these robo-advisors. Some prefer to talk to someone face to face and be able to receive more personal support about private issues. If you’re one of these people, this service might not be for you.
While it is true that robo-advisors fit perfectly in our online era, they have more development ahead. If the goal is to completely replace traditional human advisors, we still have some way to go. The way we handle our finances depends on a lot of factors, mostly of a personal nature. Therefore, it is quite understandable why sometimes we feel like we need the advice of an actual person. This is especially when we stumble upon an uncertain issue that might affect our finances.
Even so, the online investment advisor is a wonderful invention. This development brought a lot of improvements to the financial management world and will continue to do so. After all, who wouldn’t like the possibility of receiving detailed and reliable financial support? Especially while paying minimum fees and not having to leave the comfort of their own home?