Would you trust a robot to invest for you? At first, this may appear to be a risky proposition. However, the fact is that “robo-advisors” have a pretty good track record of managing investments. Want to know more about this trending investment technology? Here’s a brief guide to robo-advisors.
- What are robo-advisors?Robo-advisors are a type of online software that uses an advanced algorithm to manage your investment portfolio. They’re essentially automated investment advisors. Currently, there are over 100 robo-advisory services, a number of which are connected to major banks and financial organizations.How do robo-advisory services work?The process of working with a robo-advisor generally begins with answering an online questionnaire designed to determine your goals, timeline, risk tolerance and other relevant factors. Based on your responses, the robo-advisor will provide you with an individually curated investment portfolio. The software will continually monitor both your portfolio and the market, and it will look for opportunities to buy and sell investments.Robo-advisors typically buy and trade exchange-traded funds (ETFs).
What are the benefits to using a robo-advisor?
There are several advantages to using robo-advisory services, including the following:
- Whereas a professional investment advisor typically charges a fee of 1% to 2% of the portfolio assets, robo-advisors typically charge a 0.5% fee.
- Hands-off investing. As the whole process is automated, you can sit back and let your robo-advisor manage your investments. This makes it attractive to inexperienced investors and people with busy lives who don’t have time to follow market trends.
- As robo-advisory services operate entirely online, you can sign up, deposit and withdraw money and check your accounts around the clock and from the comfort of your home.
What are the drawbacks to using a robo-advisor?
Unlike a human investment advisor, a robo-advisor can’t answer any questions you have about investments, your financial goals or any other financial matter. These kinds of conversations can be important: they may bear on your investment decisions and help you become more savvy with your finances.
Some robo-advisory services address this issue by offering access to human investor advisors or other financial experts to answer investment questions.
Also, know that your investment options are limited with robo-advisors, since they usually only buy and trade ETFs.
Finally, it’s worth mentioning that there’s always some degree of risk involved in investing. Even if you have a low-risk profile, you need to be prepared for the possibility that you may lose money.
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