Investing in the stock market has traditionally been an overwhelming task.
This is especially true if you don’t have any experience or knowledge on how to do so.
It also has been limited to those with a good amount of money to invest.
Luckily, robo advisors are changing the game by providing investors with an easy way to invest their money while still having some control over what they’re doing.
While these online brokers are great for getting more people to invest, they are not perfect.
In this post, I share with you 10 important pros and cons of robo advisors you need to consider before investing your hard-earned cash.
10 Important Pros And Cons Of Robo Advisors
5 Pros Of Robo Advisors
There are many benefits that robo advisors offer.
Here are the biggest ones you need to know about.
#1. Easy To Get Started
Hands down, the biggest advantage of robo advisors is they are simple to get started with.
You don’t need any investing knowledge.
Simply spend 10 minutes telling them about your investment goals and answer a questionnaire about your risk tolerance.
From there, the artificial intelligence will create a personalized investment plan for you and assign you a diversified portfolio that meets your target asset allocation.
The investment portfolio you are put in is built using the Modern Portfolio Theory approach to investing, which is the gold standard.
All that is left for you to do is set up a monthly investment amount.
After that, the robo advisor will monitor your portfolio and make adjustments as needed.
These adjustments include automatic rebalancing, dividend reinvestment, and tax loss harvesting on your investment portfolio for you.
- Read now: Learn the importance of rebalancing
Many even offer education materials so you can learn about investing as you go.
Most robo advisors offer many types of accounts, including taxable accounts and retirement accounts.
And if you are looking for a wide range of investment options, many offer tax strategies for your portfolio as well as socially responsible investing.
#2. Great For New Investors
Because it is so easy to invest money with a robo advisor, they are a great choice for new investors.
Many new investors are overwhelmed by the investing jargon and financial advice out there.
Add to the fact they are putting their hard earned money on the line, it only makes sense to put off investing until you understand more about it.
The problem is that many people put off learning about investing and before they know it, they lost out on a lot of the potential growth.
- Read now: Click here to learn the investing basics
- Read now: Discover the investment terms you need to know
Robo advisor services allow you to jump in and learn as you go, while at the same time reducing risk.
Also, most new investors don’t have a lot of money to invest.
With a financial advisor, you might need to have a minimum investment of $100,000 or more before they will take you on as a client.
With a robo advisor, there is no minimum investment to get started.
Even if you have $10, you can start investing.
So small investors have zero excuses for not getting started today.
And if you are an experienced investor, you too should consider a robo advisor.
Because they offer hands off investing, you can focus your time and attention on other areas of your life.
#3. Promotes Buy And Hold Investing
Of the smartest ways to invest in the stock market is to invest for the long term.
This is also known as buy and hold investing.
You identify investments you want to buy, whether they be individual stocks, mutual funds, or exchange traded funds, and buy more shares over time.
This allows you to take advantage of time and compound interest, earning you a solid return.
#4. Always Introducing New Investment Services
When robo advisors first came on the scene close to 10 years ago, they offered the bare minimum in terms of investments and related financial services.
Over the years, as technology and the personal finance landscape has changed, so too have robo advisors.
Many now offer additional services, like checking accounts and savings accounts, as well as additional financial products.
These added services and features allow for better control of your overall financial life, which helps you not only improve your finances, but reach your financial goals.
#5. Low Fees
To work with a financial planner, you are looking at spending a lot of money.
Many work on an assets under management fee basis, which means their fee is a percent of the money you have invested with them.
For example, the typical fee for a financial professional is around 1%.
So if you have $100,000 invested, you are paying a financial planner $1,000 a year.
Many robo advisors charge fees that are typically around 0.30%.
On that same $100,000 invested, you pay $300.
By going with a low cost robo advisor, more money stays invested, which can grow into larger sums of money.
5 Cons Of Robo Advisors
As great as robo advisors are, there are downsides.
Here are the biggest drawbacks of robo advisors.
#1. High Fees
While most of the time you will pay less in fees when working with robo advisors, this isn’t always the case.
For example, some charge a flat dollar amount, like $1 a month.
On the surface, $1 a month doesn’t sound like a lot.
But let’s say you are investing $20 a month.
In the first month, you paid a 5% fee to invest since $1 is 5% of your $20 investment.
In the second month, you now have $40 invested.
The $1 fee you pay is 2.5%
Fast forward to the end of the year and you have $240 invested and your monthly $1 fee is 0.42%
The point is, in the beginning, your fee is a lot higher than the average simply because you have a small amount of money invested.
Until you get a larger amount invested, you will be paying a higher fee.
To save money, you could start investing a larger amount of money at first and then invest a small amount of money on a regular basis going forward.
Also note that there are additional fees you will pay as well.
The investment that your robo advisor puts you into will charge a fee as well, called an expense ratio.
This only adds to your costs.
Of course if you invest with a human financial advisor, you will also pay this expense ratio if they invest your money into mutual funds or ETFs as well.
#2. Limited Investment Choices
Another disadvantage of robo advisors is that they offer limited investment choices.
For the most part, you cannot invest in stocks.
Some offer mutual funds, but most offer exchange traded funds.
When you use a robo advisor, you will be investing mainly in index funds or passively managed funds from a select number of investment families.
Because of this, they are not a good fit if you want to invest in other types of investments or specific mutual funds or individual stocks.
With that said, don’t think they don’t offer a wealth of asset classes to invest in.
You will have a diversified portfolio.
The limited choices are more about the investment vehicles you can choose from and not the asset class.
#3. Not 100% Personalized Advice
Another drawback is that they are not 100% personalized.
While robo advisors offer their own investment portfolios to invest in based on your risk tolerance and investment time horizon, they are not built specifically for you.
This isn’t to say they don’t work, it just means it isn’t customized to your exact financial situation.
Robo advisors have a set number of portfolios and put you into the one that best meets your level of risk and your time horizon.
- Read now: Click here for a beginners guide to asset allocation
- Read now: See how diversification lowers your investing risk
So even though your financial goals might be a little different than someone else, if that person has the same risk profile and time horizon as you, you both will be invested in the same asset mix.
If you were to invest with financial planners, they would create a diversified investment portfolio specifically tailored to your financial goals and risk aversion.
So the other person with the same risk level and time horizon as you would have a different asset mix.
#4. No Personal Human Advisor
Taking the above point one step further, most robo advisors don’t offer a personal advisor.
For many investors, this isn’t a big deal.
But it can be for some investors.
For example, maybe you have a variety of goals in life you want to achieve.
Or maybe you want to start your own business one day.
Having a personal contact to talk to about the details, consequences, and realities of your goals is priceless.
#5. No Hand Holding
Finally, while a robo advisor will invest you in an investment portfolio based on your risk tolerance, it is not perfect.
What I mean by this is, if the market crashes and you get scared, you might decide to pull out of the market altogether.
When you have a financial advisor with you, they will hold your hand.
If you are being emotional and thinking of making a costly mistake, they are there to talk you through it and keep you on the right path.
You cannot put a price tag on such advice.
For example, years ago I worked for a high net worth financial planning firm.
One day we had a client meeting and in the meeting, the client told us over the past 20 years, he paid us over $10,000 to manage his money.
Reading this, you might be shocked that someone paid that much money.
But what he said next is more important.
He said the investment advice we gave him along with the hand holding during turbulent times was the best money he ever spent.
Without us helping him make investment decisions during the market crashes, he surely would have sold his investments and missed a lot of the gains he earned.
Because we helped him stick to his investment strategy, he had more than double the amount he started with.
Finding The Best Robo Advisor
There are many options out there when it comes to using a robo advisor.
My favorite one is Betterment.
Read now: Learn why so many investors love Betterment
They are one of the originals and have added new services and features to keep them head and shoulders above the rest.
You can get started investing in less than 10 minutes and for as little as $10.
I highly recommend them to all new investors.
Click here to open your Betterment account today!
There are 10 big pros and cons of robo advisors.
They offer a great service to individual investors, but they aren’t perfect.
With that said, they are a great starting point for beginning investors to get started with the stock market so they can reach their financial goals.