Investing your money can seem scary and confusing. That’s where robo-advisors come in. These digital tools help manage your investments using computer programs instead of human advisors. They’re changing how people save and grow their money. Before you let a digital helper manage your finances, here’s what you should know:

How They Work: Algorithms at the Helm

Robo-advisors use computer programs to manage your money. When you sign up, you’ll answer questions about your money goals, like saving for retirement or buying a house, how comfortable you are with risk, and how long you plan to invest. The program then creates a diversified investment portfolio tailored to you. It keeps watching your investments and automatically changes to keep everything on track, even when markets go up and down.

Lower Costs: A Significant Advantage

One significant advantage of robo-advisors is that they cost less than traditional financial advisors. Human advisors often charge 1% or more of your total yearly investments. Due to lower overhead, such as lower salaries and less need for office infrastructure, robo-advisors usually charge between 0.25% and 0.50%. This difference might seem small, but over many years, it can mean more money stays in your account and continues to grow.

Accessibility and Convenience: Investing Made Easy

Robo-advisors make investing simple and accessible for almost anyone. You don’t need to be rich or know much about investing to get started. Many let you begin with a low or no minimum investment. Everything happens online, so you can usually open an account in minutes, and the websites and apps are designed to be easy to understand. You can check your investments, add money, or make changes anytime from your phone or computer, giving you 24/7 access without needing appointments or paperwork.

Diversification: Spreading Your Risk

Robo-advisors are engineered to diversify your portfolio effectively. This means your portfolio is spread out among a mix of assets, including U.S. stocks, international stocks, bonds, and other assets like real estate. When one type of investment isn’t doing well, others might be doing better. Robo-advisors automatically rebalance your portfolio as the market changes to ensure you have the right mix for your needs and goals. This helps protect your money from significant losses and keeps your investment plan steady through market volatility.

Tax Efficiency: Smart Management

Some robo-advisors use special strategies to help you pay less in taxes. One standard method is called tax-loss harvesting. This means they sell investments that have decreased in value to offset gains in other investments, which can lower your tax bill. This approach can help you keep more investment returns over the long run.

Limited Human Interaction: A Trade-Off

While robo-advisors can save money and make investing easier, they don’t give you much personal attention. You can usually get help with technical issues but not detailed financial advice. If you prefer talking to a real person or have complex financial needs, you may want to consider hybrid robo-advisors. These offer access to a human advisor to go along with the advantages that come with the digital tools of a robo-advisor. However, this typically comes with an additional fee.

Not a Magic Bullet: Understand the Limitations

Robo-advisors are helpful tools, but they aren’t a guaranteed path to building instant wealth. Your investments will still go up and down with the market. While they can provide a suitable plan for your investments, robo-advisors also cannot predict what will happen in the market. These digital helpers work best as part of a long-term plan and may not cover everything you need for complex situations like estate planning or advanced tax strategies.

Robo-advisors offer a simple, affordable way to invest your money. They can be a great option, especially if you’re starting or prefer a hands-off approach to investing.

Want to learn more about robo-advisors? Contact us to discuss your options.