Ways Robo-advisors Reduce the Cost of Investing
The face of investing has undergone some changes in recent years and the most prominent being the development of the robo-advisors. What is a robo-advisor? Simply put, it’s an online version of a financial advisor to guide you in your wealth management. The investing game changed forever once the opportunity came to have people be able to invest and manage their portfolios via the internet. Because this method can be automated and does not require face time with an advisor, the costs significantly decreased. These lower costs and fees make it much more affordable for people to invest.
Traditionally, one had to connect with an individual at an investment firm to get advice on building a portfolio and managing their wealth. The most common way to pay for those services was on retainer. This means that the advisor would get a percentage of the all the assets managed every month. This typically cost around 1-1.5%. For this kind of business model to work, it makes the most sense for advisors to take on high net worth clientele. In addition to these management fees are the other costs of investing like per trade costs and transaction fees. The problem with this model is that it makes wealth management services out of reach for low and middle-income individuals.
This begs the question: how do you lower fees but still be able to provide quality services to clients? Enter the robo-advisor.
Here are three ways that robo-advisors can save money and reduce costs:
The name itself can be confusing, but technology can make it easier to take advantage of this opportunity to minimize your tax liability. Harvesting tax loss usually happens when an investment loses value. At that time, selling off those shares and replacing with something that is performing similarly can help you make the best out of losing value. Many companies do this, but Wealthfront is one example of a company that does tax-loss harvesting daily and automatically. According to their calculations , they have found the daily technique to be more effective than a once-per-year harvesting. Wealthfront has strategies in place to allow you to harvest your tax losses for larger investments like indexes and ETFs, but also for individual stocks.
No Trade Fees
When it comes to fees for trading, robo-advisors have made this very affordable. Betterment is one of those advisors doing away with fees of that nature. There are no fees to buy and sell investments on their platform, which can be very beneficial for some individuals.
Low Maintenance Fees
Rather than taking the 1% right off the top like many traditional advisors will, robo-advisors are taking a drastically different approach to the structure of their maintenance fees. Acorns is one example that has a monthly maintenance fee of just one dollar. Predesigned portfolios and automated investing make this a great option for people who want to get started with investing on a smaller scale. Acorns is unique in that it connects to your credit cards and whenever you make a purchase, it is rounded up to the next dollar. Then the change is invested for you automatically.
Wealthfront follows the percentage model and their maintenance fees are also very low, up to .35% per year. As the account balance grows, the maintenance fee decreases. A fee schedule of this nature can be a great incentive to continue growing your investment portfolio.
Is a Robo-Advisor For Everyone?
Who could benefit from investing with a robo-advisor? The answer is everyone and anyone! The reduced fees and ease of use make it possible for the everyday person to begin investing. But it can also be a good fit for high net worth individuals who would like to reduce their fees.
There are platforms like Personal Capital which allow you to keep all of your investment data in one place. Then you can access it easily via a mobile app. They also offer other financial tools to help track your net worth and cash flow. So not only can you invest with lowered costs, but you can also have all the information you need about your finances at your fingertips.
Wrapping it up
For some individuals, one of the biggest turn-offs about working virtually with a robo-advisor is the lack of face-to-face communication with a real person. While there are companies like Personal Capital that offer the option to connect with a real-life advisor should you have that desire, it will not be the same as an in-person experience. That is a very rational argument for choosing a traditional advisor. While reducing fees may be the priority for some, customer service and interaction might be better for others. Whatever you choose, weigh your options and shop around.