Robots perform all sorts of mundane tasks — such as vacuuming and mowing the lawn — freeing up our Saturdays for a trip to the mall or a leisurely round of golf.
But should you trust a robo advisor to invest your hard-earned money?
You’ve got some money to invest, and you’re looking for the best way to make it grow — but should you invest with a robo advisor or a real-life financial advisor?
The answer to that question is, “It depends.”
Because no two investors are alike, there’s no such thing as a “one-size-fits-all” approach when it comes to investing.
What are “robo advisors?”
Robo advisors are automated investing platforms that use algorithms to manage your investments — such as Wealthsimple , Nestwealth and Justwealth — often for less than half of what you’d pay a bank or financial investment firm.
But while robo advisors can give you some guidance to help grow your wealth it’s important to note that they only offer a service, not financial planning.
And because a robot isn’t capable of understanding the complexities and nuances of your life it can’t sit down with you and talk about why you’re investing — or empathize with your values, goals and dreams.
Robo advisors do have some benefits…
Many investment advisors require their clients to meet a certain asset level before they qualify for full-service investment management and planning.
So there are some instances when using the services of a robo advisor makes good sense.
- Working with a robo advisor is a low-cost solution to investors who are new to the game and have a relatively small amount to invest (typically under $100,000). This means you don’t have to be wealthy to have access to the markets.
- Some companies don’t even require a minimum investment amount, which means you can start investing with as little as a dollar — and because the stakes are so low, using a robo advisor is a relatively low-risk way to get started.
- The fees required to invest with a robo advisor are less than it costs to hire an actual human — with some charging no fees at all — leaving you with more money to invest.
- Robo-advisors don’t need a lot of input from you (aside from the initial risk-assessment questionnaire) so it’s perfect if you want a passive, hands-off approach and don’t want or need professional financial advice.
And because robo advisors are robots, they never sleep or take holidays — so they’re available to you 24/7.
Sometimes you need the human touch…
If you’re in your 20’s and you don’t need anything more than investment management, a robo advisor may be all you need — but investing only represents a fraction of the financial pie.
- When your circumstances change — say you’re starting a family, saving for the kid’s education or planning for retirement — you’ll likely find the advice you get from a robo advisor rather limited.
- There’s something comforting about being able to pick up the phone and talk with a real human — someone who knows you and your family situation and can help you decide, for instance, if it’s better to put your money into a TFSA or an RRSP.
- If you have a large portfolio to manage, your financial needs are more complex — so you’re more likely to benefit from financial planning. A financial advisor can help with strategies to minimize your tax burden while growing your wealth.
- A robo advisor can’t necessarily protect you from making emotional (and irrational) decisions — or keep you from panicking during a market correction.
Why do you need an advisor at all?
As a financial planner, I can tell you most people need help investing — managing an investment portfolio well is difficult to do completely on your own.
In order to minimize mistakes and maximize returns, you have to:
- Commit the time, energy, and attention required to manage your investments
- Know how to properly diversify your portfolio and manage your risk so that it aligns with your needs and goals
- Understand how to grow your wealth while avoiding unnecessary risk — and know the difference between risk tolerance and risk capacity (and how to apply these factors to your portfolio)
- Know how to evaluate funds for expense ratios and other fees
So, if you’re not a confident and disciplined investor with free time on your hands, you’re better off using the services of an advisor — the only question is whether that help should be from an algorithm or an actual human.
It’s possible to have the best of both worlds…
The technology behind robo advisor is available to most investment advisors — and by using this technology an advisor can focus on your financial planning needs while keeping your costs down.
This combination can be very beneficial when you’re just getting started and don't want to go it alone — and when your assets accumulate you’ll have someone there to advise you how to manage them.
Want to know more about financial investment and planning?
There’s a lot to know about financial investing and planning — and this article is meant to give you a brief understanding of how you might benefit from using the services of a financial advisor (robot or otherwise).
Our advisors will be happy to discuss your need for financial planning and investment to grow your wealth.
It’s important to note that time is your biggest asset when it comes to investing — so don’t delay.