How do Robo Advisors Work and Why You Need One

With more than half of Americans afraid to engage with the stock market, many stay away for fear of the complexity of the market. The people who are wary of dealing with the market could benefit from learning how do robo advisors work. With the help of robo-advisors, people with no experience with investing can get involved with buy and trading in the stock market.

If you’re wondering what robo-advisors are and how they work, check out our guide.

Getting to Know Robo-Advisors

Robo-advisors are a type of software created for the sole purpose of helping people to manage their investments. They can be used by people who are experienced with the market as well as those who are novices. While they can be instructed to make decisions about trades, they can also work as advisory tools.

If you don’t want to or can’t afford to hire a financial advisor, a robo-advisor could be your guide to navigating the daily complexity of the stock market. While it’s not a hard and fast rule, the people who are less likely to hire a financial advisor will typically be new DIY investors. Rather than selecting investments, rebalancing, and then placing trades on your account, a robo-advisor can do that for you.

While their information doesn’t have to be binding at all, you can use it to make smarter decisions about markets you don’t know about. The software is set up to make changes to your investments so that your portfolio is constantly aligned with your target allocation. While some robo-advisors can even make automatic trades, this setup isn’t for everyone.

However, this is one tool that has empowered DIY investors massively in the last few years. If you want to build a strong portfolio and have some guidance for a low price, software tools can be a massive help.

Get to Know the Fees

Robo-advisors are usually cheaply priced to get users through the door. However, once you’re on board, they’ll ask you to pay a service fee and for the expense of each investment used.

Your service fee could be a fixed monthly fee or could be calculated as a percentage of your assets. Depending on the size of your portfolio, you could spend anywhere from $10 to $200 per month for access to the services.

When they take a percentage of your assets, it’ll be anywhere from .15% to .5% of your total account size. While this might not seem like a lot, it could add up quickly if your portfolio isn’t outpacing your charges.

If there are any expenses associated with any investments, expect that your robo advisor will pay for them. Since expense ratios apply to most assets fro mutual funds to exchange-traded funds, you can expect the fee to be taken out before you see a dime.

Since you’re likely to be eligible for a free trial from any number of robo-advisors, you should take them for a test drive before you hit the road.

Get to Know the Benefits

Making a mistake while investing could trigger a massive loss to your portfolio. If you don’t have all the information you need, you could go ahead and pull the trigger on an investment that doesn’t have long-term returns. Your own behavior could set you back a year or more.

If you make an emotional decision when the market is high or low rather than paying attention to trends, you could regret it. Basing your investments on gut feelings can only work for so long. Thankfully the software that forms the framework for robo-advising isn’t susceptible t mistakes.

You’ll have a less stressful time investing when your robo-advisor has made changes for you. The whole process of making changes to your portfolio could have you torn. Rather than pulling your hair out trying to figure out whether to invest more in financial services than technology, your robo-advisor can figure it out.

Rather than worrying about a broker who might have a personal interest in seeing you invest in a certain way, you can use the neutral party of a robo advisor instead.

Do You Need a Robo-Advisor?

It depends on what kind of investor you are, what kind of money you think you’ll have to invest, or how much time you think you can devote to investing. If you’re a young professional or a beginning investor looking to put your portfolio on “autopilot” for a few years, robo-investors are the way to go.

If you just want the simplest course for investing, robo-advisors are the way to go.

If you have stock options or need to coordinate company benefit packages, you might not find robo-advisors to be ideal. When worrying about a 401(k) or other retirement accounts, you’ll need a customized approach. The impact of investing could be too great on you and your family to leave it to an automated system.

You can always have a mix of managed assets along with some managed by a robo-advisor. If you’ve got a large portfolio with big assets, leave that to a hired professional. If you want to play with some investing on the side, that’s when you could break out a robo-advisor.

DFA Fund Robo Advisors are great for executives trying to plot out their financial future.

Still Wondering How Do Robo Advisors Work?

If you don’t have a good grip on how do robo advisors work, you should sign up for one of the many free services available and fiddle around with it. You might find that you prefer working with a robo-advisor than with a financial services professional. If you need a system that you can set up and forget about, robo-advisors are right for you.

If worrying about investing is stressing you out, check out our guide to planning your next professional retreat.

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