These new emerging financial technologies help service a wider market, which has historically been excluded from the investing world. With the help of technology, the prospect of investing is becoming less foreign for new players. Statista
forecasts a growth of robo-advisor users from 45.8 million in 2019 to 147 million in 2023.
What is a robo-advisor?
Robo-advisors are financial advisors that use algorithms to provide financial and investment advice and manage investment portfolios automatically. Robo-advisors eliminate the need to hire an investment broker.
Investments help you keep up with inflation
There are many benefits to investing your money. Investments help grow your wealth and secure your financial stability in the future. It’s also an important way to keep up with inflation and ensure that your savings are worth just as much when it comes time to use them.
There are tax advantages to investing
There are also plenty of tax advantages from investing your money in certain accounts like an IRA instead of claiming it as part of your income. Those who are discouraged from participating are missing out on an important part of growing and securing their wealth.
Compound interest is important
Despite the obvious advantages of investing, many Americans are shying away from investing. The stock market is a public institution open to anyone to participate, yet many feel it is reserved for just the wealthy or economically savvy.
While wealth management firms have helped the average layperson participate without much prior experience or financial knowledge, these firms have historically favored the wealthy. As Michael Katchen, CEO of Wealthsimple, explains,
“Traditional investment managers have high fees and big account minimums just to use their services. So that meant lots of people – and younger folks in particular – weren’t being served by the financial services industry.”
These hurdles affect young people who need investing resources the most. It’s particularly important that young people start investing as early as possible in order to take advantage of compound interest.
You need to give your money enough time to grow
According to Andy Rachleff, the CEO of Wealthfront,
“The biggest mistake you can make as a young person is sitting on the sidelines and not investing. Starting to invest as soon as you can is crucial to your long term financial success.”
Young investors who are deterred from investing are not giving their money enough time to grow.
The economic divide in the United States continues to rise. Many Americans suffer from increasing job insecurity and income disparity. High barriers to entry only serve to deepen the inequality in our country and make economic mobility even more challenging.
We should all have the same opportunities to grow our wealth and secure a more stable economic future for ourselves and our families.
Reducing the financial barrier to entry
The problem: Financial structure of advisors that favors the rich
Before digital advisors, the alternative to investing yourself was hiring a financial advisor. The problem with financial advisors is that their revenue structure naturally favors clients with larger portfolios.
They earn a small percentage of each client’s investments, so the more money your advisor manages, the more they earn. Because of this, most advisors won’t even bother taking on clients that don’t reach a certain account minimum, which are not worth their time and resources to maintain.
Even if you do manage to reach their account minimum, you’ll still have to contend with a fee structure that favors higher investors. Advisory fees work as a sliding scale, with the highest fees taken from the smallest investment accounts and the lowest fees taken from the highest investment accounts.
The robo-advisor solution:
Robo-advisors can afford to charge less than traditional management firms who have a much larger overhead when using human advisors to manage and maintain each portfolio rather than an algorithm.
The typical robo-advisor charges around a quarter of the standard brokerage fee. Matt Burgener, the CEO of Blooom puts it perfectly:
“Robo-advisors are built on technology that makes it efficient to help anyone, regardless of account balance. This technology allows robo-advisors to charge significantly less to help you invest.”
Blooom is a robo-advisor that specializes in workplace retirement plans like 401(k)s. They actually take the equal opportunity approach one step further with one low-cost flat fee of $10 a month instead of a tiered pricing structure that favors higher account balances.
In addition to taking on high fees, robo-advisors like Blooom require a much lower account minimum. In fact, Blooom has no account minimum at all. You could open an account and start investing with as little as $1 and get $15 off your first year of Blooom with code BLMSMART
They’ll even analyze your 401(k) for free and offer their recommendations. Blooom has made it easier and cheaper for anyone to make sound investing decisions with their employer-sponsored retirement program, a task that was previously daunting and expensive.
Providing equal access to financial advice
The problem: Financial services are reserved for those who can afford them
Financial illiteracy exists across all backgrounds. Everyone needs access to these services. The benefit of using a traditional firm to manage your wealth is that they give you all the resources you need to get on the right track.
They provide much more than just investing advice. They organize your finances for you and set you up with a financial plan based on your lifestyle and financial situation. They can help you make important money decisions and give you the right tools and information to ensure you’re doing everything you need to be doing.
An independent study run by Wealthfront illustrates the impact that a financial planning service can have. Their study found that clients who used their financial planning service saved 5% more of their income than those who didn’t.
According to the Andy Rachleff, Wealthfront CEO, “over one’s lifetime, that’s another $1.25 million at retirement!” But before these digital services started appearing, not everyone could afford a financial advisor or had a large enough portfolio balance to be eligible for them.
The robo-advisor solution:
Robo-advisors turn the traditional wealth management structure on its head by offering the same consistent service for any size portfolio. Many robo-advisors offer comprehensive financial planning resources, access to certified financial advisors and fantastic educational tools, free of charge.
There are a lot of options on the robo-advisor front; here are just a few of the ones that have caught my attention and that I think are particularly enticing.
Betterment helps you invest and plan your finances with their team of licensed financial experts and there is no minimum investment whatsoever to sign up. I like that Betterment is completely independent which means they have no affiliation with a fund provider. The annual fee includes 0.25% for robo-advisor services. If you have $100,000, you’ll pay 0.40% to be a part of their Premium plan which includes unlimited over-the-phone advice. Plus, their portfolios are customized for you based on your financial situation, personal preferences, and risk tolerance.
Wealthfront is another popular robo-advisor that offers great personal finance resources, but you do need a minimum of $500 investment required to open an account, and they charge 0.25% fee for robo-advisor services. They have had amazing success as a company which is a plus as well. The only downside is that you do not have access to financial advisors if you want access to individuals to help you with your investing questions,
Wealthfront’s online financial planning tools, I’ve found, are great for helping plan for certain goals, like retirement, buying a home, college and travel. This is no generic tool. It provides personalized assessments and recommendations based on your specific financial situation. You can even link your financial accounts and the tool will analyze and compare your current spending to the national average to give you a sense of how much you need to reach your particular goal.
Personal Capital is another option for you if you’re looking for an online financial advisor who offers more of a hybrid approach to the robo-advisor genre. But you need more capital – the minimum balance to begin investing is a hefty $100,000. While Personal Capital’s online tools are free, they charge 0.89% a year on accounts up to $1 million dollars and lower percentages in increments for additional millions of dollars you may be investing. In my mind, Personal Capital is a great choice if you’ve got the money and you’re looking for a more hands-off investing experience with a company that earned the reputation as being worth every penny they charge you.
Personal Capital also does an excellent job linking all of your accounts linked together in one place including IRAs, 401ks, mortgages, loans, credit cards, checkings, and savings), so you can better track and manage your money as well as budget.
Ally Invest is an extremely attractive option these days on the investment front because they offering are offering Managed Portfolios (what they call their robo-advisor) with $0 trading costs and a $0 account minimum to start your investing journey. With Managed Portfolios, you need just $100 to open up your account.
There’s almost no reason not to be checking out Ally Invest with everything they are now offering at this point in time that does not cost you anything extra. Plus Ally works with companies who are socially responsible and have ethical track records in the investment world. For me, that gives Ally an edge on its competitors.
M1 Finance is another hybrid-like robo-advisor that automates and customizes your investment portfolio and automates all of your trading activity but also operates like a traditional brokerage. M1 aggregates all trades but also lets you select particular stocks that you may be interested in investing in. So if you’re interested in a robo-advisor where you’ve got a bit of control and say over your investments, then M1 is going to be a better choice for you. And the good news here is that there are no commissions and no minimum starting balances.
Simplifying investing for all experience levels
The problem: Complex investing puts novice investors at a disadvantage
It’s a tough sell to ask someone to put a large chunk of their hard-earned money in someone else’s hands, without knowing where it goes. As Michael Katchen of Wealthsimple laments,
“So many of us find investing complicated and overwhelming, which leaves us feeling out of control.”
Even just setting up an account with a traditional brokerage takes time and requires some basic financial knowledge. This has been a huge deterrent for many potential investors who don’t want to give money to someone who doesn’t speak their language.
And if you can’t afford to use a traditional brokerage, investing on your own can be incredibly complicated.
The truth is that investing is a complex beast. Beyond just choosing your investment, your choices can have a serious impact on your overall returns. If you don’t know better, you may also find yourself losing money on brokerage fees, trading platform fees, and even inactivity fees.
Plus, portfolios require regular maintenance to make sure you’re avoiding unnecessary fees and taxes. The process of rebalancing your portfolio is quite complicated to do yourself and requires a solid understanding of the market.
In fact, only 52% of people actually rebalance their stock portfolio more than once a year, which means that a large percentage of investors aren’t doing everything they can to avoid costly fees and taxes.
The robo-advisor solution:
Ease of use
According to Katchen,
“Companies like ours are making great investment advice accessible to everyone through technology. We’re also simplifying investing by making it human. We simplify it so that you can get on with your life.”
Many robo-advisors provide complete guidance from start to finish – from advising how much to invest to deciding where to allocate your funds. Complete novice can get started without getting into the weeds of complicated numbers, jargon, and paperwork.
Sound investing advice
Most robo-advisors will either let you pick from their recommended portfolios or tailor your portfolio based on your risk tolerance, goals, and finances. Either way, you can sleep easier, knowing that your money is going into a safe, researched-backed portfolio.
Some companies even offer portfolio reviews to check that your investment is fully optimized. Wealthsimple actually offers this service free of charge. Anyone can upload their latest statement for an analyst to review for investment allocation, account fees and tax efficiency based on goals and timing.
Less routine management
What’s great about robo-advisors is that you can sit back and relax knowing that their complex algorithm is taking care of your investment for you.
Robo-advisors do work in the background, regularly maintaining and rebalancing your portfolio without any involvement required from you.
Dividend reinvesting and tax-loss harvesting is done on a regular basis and costs nothing extra.
Enabling more ethically-aligned investing
The problem: It’s difficult to invest responsibly
The majority of socially-responsible investing strategies are utilized by high net worth and institutional investors. That’s because it has been historically more difficult for individual investors to invest in funds that are also committed to social and environmental responsibility.
According to Dave Fanger, the CEO of Swell, many investors don’t understand how hard it is to see the underlying securities within their investments. It can be difficult to know who your money is actually supporting.
The robo-advisor solution:
More robo-advisors are giving clients the option to choose from portfolios that are aligned with their personal philosophy.
Wealthsimple has socially-responsible or halal-compliant portfolio options. Swell, is an investment platform that specializes in creating socially-responsible investing options. Swell helps you invest in high-impact, high-growth companies and even gives you the option of excluding up to three companies from your portfolio.
“Until now there haven’t been many options for retail investors to get started. Over the next few years we expect more investors to get started investing this way as more options enter the mainstream”, says Fanger.
As digital investing solutions continue to proliferate, more investors who have been historically overlooked have more opportunity and more options for growing their money and doing so on their terms.
When investment tools and financial services are made more accessible, everyone wins.
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