If you’ve set your sights on Financial Freedom, you’ve learned how essential investments are to that goal. They’re the backbone of the strong Income Generator that will accelerate your Freedom and produce the reliable income you need to sustain it. And you’re not alone.
The Spring 2017 Merrill Edge Report found that an astounding number of Americans—including nearly two-thirds of millennials—have shifted their focus. Instead of shooting simply for security in retirement, they’ve chosen Financial Freedom as their goal. As a result, people are looking to invest earlier, maximize their asset growth and take a more hands-on approach to constructing their Freedom Generators.
And the advent of robo-advisors may provide just the means by which you can accomplish those goals. So let’s take a look at what robo-advisors are, how they can accelerate your path to Freedom and when you should ditch your automated guru in favor of a human expert.
Why Consider A Robo-Advisor?
A robo-advisor is a complex computer algorithm. Depending on which robo-advisor you use, you’ll receive advice on your portfolio structure, rebalance your assets, reinvest your dividends, buy and sell funds for you and more.
An increasing number of brokers—including Charles Schwab, Fidelity and TD Ameritrade—offer robo-advisor services to their clientele. Plus, these services are typically available for a variety of account types—brokerage accounts, retirement accounts, college savings accounts, trusts and more.
Here are some of the best reasons for trying out a robo-advisor:
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- They make you a better money manager. Robo-advisors allow you to get your hands dirty with your finances while a financially shrewd, robotic friend helps out. In fact, the Merrill Edge Report found that people who use online, money management resources like robo-advisors feel “knowledgeable, empowered, and savvy.”
- They save you time and costly mistakes. Experts agree that keeping your asset allocation in line with your risk profile is important to stay on target with your financial goals. A robo-advisor can handle time-consuming, error-prone jobs like portfolio rebalancing, automatic deposits and tax-loss harvesting.
- They get you access to investment advice sooner. If you’re looking for an investment advisor, you may need to round up $500k to invest before one will give you the time of day. And if you’re interested in getting into managed funds, you’ll need at least $100k to put down. Robo-advisors typically require only a few thousand or even a few hundred dollars to provide sophisticated support and diversify your portfolio.
- They offer significantly lower fees than humans. If you’re looking for the rapid growth that comes from compounding, then high fees are just what you don’t need. A typical investment advisor’s fees of 1% to 2% takes a huge bite out of your gains. Contrast that with robo-advisor costs and ETF expense ratios as low as 0.1%. At that rate, you’ll easily accelerate your returns and cash flow.
When Should You Skip The Robot?
A robo-advisor excels at a number of investment-related tasks. So this may be the right choice if you have little investment experience, insufficient funds for a financial advisor, a relatively simple portfolio or a long way to go to reach Freedom.
What a robo-advisor can’t do for you, however, is help you plan your long-term, big-picture strategy. It can’t give you a plan for eliminating your debt, creating your estate documents or figuring out how much to Pay Yourself First. And the risk profile or recommended funds you receive from a robo-advisor may not capture the intricacies of your life circumstances.
What are your options if a robo-advisor isn’t right for you?
- Choose a human advisor instead of a robot. A financial advisor with a fiduciary responsibility is trained to work with you. They analyze your unique financial situation and create a comprehensive money plan to achieve your goals. (Just make sure they understand you’re investing for Cash Flow, not net worth!) They’re also available to answer questions.
- Go it alone. If you already have a plan in place, and you feel confident in your ability to stay organized and execute it, then tackling your finances solo may be the way to go. Remember: Even if you manage your money by yourself, you can always find support in the MindShift.money community!
- Look into a hybrid robot-human service. Some brokerage firms—like E*TRADE, TD Ameritrade and Vanguard—offer a robo-advisor service paired with access to a human financial expert. The robot gives you advice and handles the grunt work of portfolio management. But the live person is accessible to answer your questions and validate (or disagree with) the robot’s counsel. They inject the human experience into your investing.
If you’re ready to accelerate your path to Freedom and jump into investing with confidence, consider a robo-advisor! And see whether an automated assistant can assist you in building a stronger Freedom Generator.
Community Question: Have you used a robo-advisor? What have been the benefits and disadvantages of having one involved in your portfolio management? Share with us in the Financial Foundations community!
image credit: Bigstock/a-image
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Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.