As modern technology grows, more and more people are being forced to become tech-savvy. Now more than ever we are browsing the web, making online purchases, and using social media platforms on a daily basis. But what about retirement planning? Is there a way for you to invest your savings “safely” without seeking the usual, in-person advice from a financial planner? If you are looking to take control of your own financial planning and have a basic understanding of the market, then automated investment platforms or “robo-advisors” may be for you. These automated investment portfolios are designed with algorithms set to recognize market trends and react appropriately to increase the value of your portfolio over time. Here are a few of the pros and cons you should consider before investing in your first digital portfolio.
Pro #1: Easy Access
With digital advice platforms you will not have to continuously call your financial advisor to inquire about the performance of your portfolio. You can easily access your account 24/7 from anywhere with an Internet connection. Upon opening your account, you will be asked a series of questions to assess your investment goals and risk tolerance. This will help the platform to determine which investment strategy is best for your individual needs. It also allows you to adjust your investment strategy later as your needs change.
Pro #2: Low Account Minimums and Fees
Robo-advisors do not require a major amount of capital to get started with your retirement planning. Most will allow you to start investing with as little as $500 or less. This will enable you to evaluate its performance before allocating more of your savings. Many mutual fund advisors will not let you even open an account with anything less than $2,500. In addition, these investment platforms only charge about 20 to 30 percent of your usual AUM firm fees. By investing your savings digitally, you can invest less and keep more.
Pro #3: Unbiased Investment Advice
Another great advantage of using digital advice platforms is that you can be sure the advice you receive is not pertinent to what makes your advisor the most in commissions, but instead what is best for your own individual situation and personal goals. You are in charge of your own investment choices and your portfolio will be diversified, accordingly.
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Depending on your situation, using these investment vehicles may resolve many of your reservations of investing in a retirement portfolio. However, just like any other benefit there are also disadvantages, too.
Con #1: No Personal Guidance
Unless you are well-versed in the financial markets and know exactly where you would like to be, come retirement time, then you are going to need some professional guidance. Although robo-advisors provide you with a questionnaire to assess your retirement goals, they will not take other future objectives into consideration. Some of these may include saving for your kids’ college fund or paying off your mortgage. The performance of your automated portfolio will be strictly focused on attaining your overall ROI goals for retirement only.
Con #2: No Pep Talks
Market swings happen. It is just part of how the economy works. But if you have a real-life financial advisor, he or she may be able to comfort you in those uncertain times. A digital portfolio manager will not stop you from making emotional decisions, nor will it give you advice on what you should do to counteract downswings.
Con #3: Uncertain Economic Endurance
Since digital advisors are fairly new technology, they have not yet been tested over decades of economic cycles. There are no real drawdown strategies and therefore it cannot assess and react to risk that it has never experienced. In the event of another market correction, the platform’s algorithms may not measure to risk appropriately.
Modern technology has allowed us to solve many common issues in our lives. Retirement planning can now be another one of those resolved issues. If you are looking for an alternative to a human advisor and have a do-it-yourself mindset with a risk awareness of the market, then investing in a digital advice platform could be the answer. If you have had any personal experience using robo-advisors, please feel free to leave a comment and visit our Finance forum or connect with our partners at our Finance Directory.
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