Robo-advisor provides automated financial planning and investing and is typically used in place of a traditional financial planner. Robo-investing is often an easier, more convenient way to invest than working with a human financial advisor.
A robo-advisor’s job is to create and manage customized investment portfolios. Users sign a discretionary management agreement with the robo-advisor, allowing the service to invest funds, allocating initial capital and making future adjustments to investments and strategies based on market conditions.
1. Create an account and deposit funds
Once you’ve selected a robo-advisor, you’ll open an account with the service. You’ll be asked a series of questions, like your age, investment goals and risk tolerance, that will help determine investment options suitable for you.
You’ll also need to establish a bank account to fund the account. While it's important to make an initial deposit, most robo-advisors require a bank account remain linked and connected to enable fund transfers.
2. Robo-advisor allocates funds
Your answers to the questionnaire help the robo-advisor determine how to invest your money and the asset classes in which to allocate your funds. Most robo-advisors use a strategy known as a modern portfolio theory, which prioritizes diversification to avoid risk, investing in low-cost mutual funds or exchange traded funds across different assets while also offering tax-loss harvesting.
Your goals are important, and the robo-advisor will use them to help determine the appropriate asset allocation - the right balance of high- and low-risk investments that help ensure your investment will grow to meet your goals.
3. Robo-advisor manages your account
Over the short- and long-term, robo-advisors automatically adjust to market conditions, a process known as "rebalancing,” to ensure your money grows to meet your goals. Most robo-advisors are required to report their progress to you, and many provide options for optimizing your investments’ performance.
Different robo-investors offer different kinds of investments. Some are focused on retirement investing, others are designed for a variety of goals, with a variety of investing options. When selecting a service, ask yourself these two questions.
Most robo-advisors offer ETFs or index funds or both. Typically, you can choose between a few funds, comparing risks, performance, fees and strategies. With some robo-advisors, you can define your goals and let the service make all the decisions for you.
Some enable more specific transactions, like fractional shares and individual stock trading. Regardless of your initial choice, it’s important to monitor your robo-advisor’s progress. Pay attention to the fees, and make sure your robo-advisor of choice is designed to meet your individual goals.
If you have short- or intermediate-term goals, like homebuying or a wedding or other milestones expenses short of retirement, a standard investment account offers the flexibility you may need. They often don’t have limits on how much money you can invest or withdraw.
In contrast, many retirement accounts and education-specific accounts have contribution restrictions. They limit how much you can add to them each year and typically have restrictions on how much you can withdraw. With tax-deferred benefits, they’re designed for long-term goals.
When choosing a robo-advisor, make sure it offers accounts and investing options that match your goals. Some robo-advisors require a large initial deposit to get started, too, and some charge penalties if your balance falls below their account minimums.
Here’s a short list of robo-advisors with competitive returns.
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With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.