From robot vacuum cleaners and smart lightbulbs to cars that help us drive, we’re depending more on machine “intelligence” to conduct our lives.
The trend has hit retirement investing in the form of “robo-adviser” companies that offer automated investment advice and management for much smaller fees than human advisers charge.
So far, robo-advisers aren’t common within workplace retirement plans, and they’re used to manage only “a tiny fraction” of investments, according to US News. But some analysts believe they could represent the future of investing.
You probably know the names of some frontrunners, including WealthFront, Betterment (affiliated with Fidelity Investments), LearnVest, Vanguard Personal Advisor Services and Schwab’s Intelligent Portfolios. Investopedia lists nearly two dozen of these companies.
Cutting out human advisers
Robo-advisers are pitched as a way to cut out financial advisers — and the fees they charge. The way it typically works, clients use online tools that allocate funds into a diversified portfolio of investments, often at rock-bottom cost.
The asset mix is typically decided by how the client answers an online questionnaire that asks about such things as your risk tolerance, retirement timeline and how much is being invested. Portfolios are usually held in shares of lower-cost exchange-traded funds (ETFs).
Using computer algorithms to design portfolios is nothing new. “Robo-advisers use the same software as traditional advisers,” says CNBC. But robo-advisers cut costs by stripping out estate-planning, retirement-income planning, tax strategies and other services traditionally performed by financial planners.
Robo-advisers are often described as a product designed for millennial investors, given their comfort with computers. But the simplicity and cost-effectiveness of robo-advisers has potential appeal for all ages.
There are trade-offs, however. These pros and cons can help you decide if robo-advice is right for you:
Pro #1: Lower fees
Robos drive management fees down to levels ranging from zero to 0.75 percent of your account balance. Fees may also vary depending on the amount you have invested. You may also have to pay management fees charged by the funds you’re invested in. This LifeHacker chart compares fees and minimum investments for six robo-advisers.
Fees matter more than you might imagine. A total charge of 1 percent of your investments is standard, says business writer Sarah O’Brien at CNBC.
The cost over time for managing your 401(k) can be significant.
“What’s 1 or 2 percent? Well, over your working life it could be enough to buy a house,” says Money Talks News founder Stacy Johnson. As far as he’s concerned, paying anything is paying too much. Check out A Simple Way to Invest Your Retirement Savings for his no-cost, 15-minute approach.