Improve Your Investing: Robo-Advisors Are Becoming More Human

In recent years, many consumers have started using robo-advisors to help them invest.

Robo-advisors make it easier for you to invest and build wealth over time. Additionally, they’re so popular because you can start investing with a relatively small amount of money.

But does it make sense to use robo-advisors in every situation? We explore.

When to use a robo-advisor

It makes a lot of sense to use a robo-advisor when you’re just starting out and when you’re planning for long-term goals like retirement. On top of that, robo-advisors use algorithms to create portfolios based on principles of Modern Portfolio Theory and your risk profile.

As a result, robo-advisors are great for investors who use dollar-cost averaging to build retirement portfolios. Many robo-advisors use index ETFs to create an asset allocation that makes sense. On top of that, many robo-advisors will change your asset allocation as you get closer to retirement.

If you aren’t interested in frequent trading, and if you have a relatively small amount of money to invest right now, robo-advisors can work really well to get you started. Robo-advisors are also good for those who are just beginning to learn about investing. As you learn more, you can tweak your plan and consider using other investment tools.

As your portfolio grows, a robo-advisor might not be enough to help you manage the money appropriately. This is especially true if you’re starting to have additional goals for your investments. Once you begin to make more plans with your money, and once you start having a bigger portfolio, you might need more personalized advice.

At some point, you may even reach the point where it makes sense to hire someone to manage your investments on your behalf.

When to pay for human financial advice

While robo-advisors can be great if you already know what you want to do with some of your money, they don’t really work well if you want help finding a direction or figuring out how to use your investments to help you reach various financial goals.

A robo-advisor can’t help you put together a long-term financial plan. Additionally, in some cases, you might have access to limited investment choices. A human money manager or financial planner can look at your total financial picture and help you build a portfolio that helps you reach other goals.

It’s worth it to pay for human financial advice if you have more complex goals and a bigger portfolio. Even if all you do is get a financial plan and ideas of how to reach those goals, making a payment to a fee-only advisor to get help can be well worth it.

Many wealthy investors often have others manage their assets for them because they don’t have the time or the inclination to do it themselves.

A hybrid solution: robo-advisors with financial advice

If you don’t need full-service financial planning or investment management, a hybrid approach can work well. You get the basics with your robo-advisor, and then are able to go a little deeper and save for a variety of different goals with the help of human advisors.

It’s a flexible approach that can be ideal for those who don’t need a full-time advisor, but still want guidance with the overall plan.

Recognizing that many investors want more direction and help with their finances and their portfolios, some robo-advisors are starting to add a degree of customization and human interaction:

Betterment

Betterment has changed its offering to include help with investing and financial planning. If you have a larger portfolio, with a minimum balance of $100,000, you can sign up to pay a higher annual fee and have unlimited access to a team of financial advisors.

Customers not on Betterment’s Premium plan can purchase advice packages for an additional fee to speak with a financial advisor.

Wealthfront

Wealthfront is a robust all-in-one personal finance tool, including a simple and effective investing platform. It’s quick and easy to get set up with a personalized portfolio with diversified, low-cost index funds. Wealthfront also allows account holders to automatically save and invest funds using their Self-Driving Money™ tool. There’s no manual trading required, and Wealthfront automatically rebalances your portfolio and reinvests your dividends.

Empower

Empower uses Registered Investment Advisers (RIAs) in addition to sophisticated technology. It’s possible to talk to knowledgeable advisors as you set your goals and work toward creating a portfolio that works for you. It’s a hybrid approach that can help you manage your money.

(Personal Capital is now Empower)

Vanguard

Vanguard added an option to choose portfolios that are designed to help you reach your goals automatically without the need to necessarily have someone tell you what to do. However, personal advisor services are available to complement your portfolio.

Other fintech companies are also offering hybrid services. SoFi Wealth is a new service that combines elements of robo-advising and personalized human advice.

Summary

We have more options than ever for investors and savers. There are a number of tools that allow investors to take charge of their finances and start investing. However, once your portfolio becomes bigger, or you want to diversify your holdings to meet different goals, it’s time to consider paying for human advice.

You might not need a full-time investment advisor or money manager, but you might need to pay a fee to have someone help you develop a plan. In other cases, it can work to invest with a robo-advisor that takes a hybrid approach.

Carefully consider where you’re at with your investments and money management and choose an investment approach that works for you.

Tom Drake is the founder of MapleMoney, an award-winning Canadian personal finance blog. Tom’s expertise has been featured on Forbes, The Globe and Mail, Entrepreneur, and MoneySense.

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