June 11, 2017

What are Robo-Advisors?

Robo-AdvisorsThe recent rise of financial technology has lead to the creation of Robo-Advisors, a new way for regular people to invest in global markets. These programs use computer algorithms to determine the best investment allocation for each client, based on their personal risk tolerance, age, and goal.  Most Robo-Advisor programs invest strictly in ETFs or Exchange-Traded Funds, but some newer programs like M1 Finance, give users even more freedom to choose what they want.  ETFs are investment securities that are composed of many stocks and/or bonds, and often mimic indexes like the S&P 500, Dow Jones Industrial Average or the NASDAQ.  These types of securities can be used to build a very strong portfolio of global equities and bonds, allowing one to diversify across the world.

Robo-Advisors – Very Low Entry Cost with Little or No FeesRobo Advisors Better For Your Money

One of the greatest benefits of using Robo-Advisors is the incredibly low entry cost with little or no fees. This is possible through reducing expenses normally associated with other investment brokers.  Since so much of the typical broker work is automated through the program’s investing algorithms, these start up companies can focus their time and resources on marketing and improving their program.  This drastically reduces the company’s expenses; the resulting savings are passed down to us, their clients. One of the Robo-Advisors that we are currently invested in, WiseBanyan, charge zero fees, allowing you to keep every penny of your invested money.

Robo-Advisors Focus On ClientsLet your Robo-Advisor help you with your Taxes

Another fantastic service many Robo-Advisors provide is Tax Loss Harvesting.  If you choose to use this service, the program will attempt to save you money on your taxes each year by selling securities at a loss and reinvesting the money into another security that is very similar to the original.  At first, that doesn’t sound too appealing. But when you consider how much money you can save at tax time, it becomes very obvious and logical. For every security sold at a loss, this amount is deducted from your investment taxes and drastically reduces the amount of money that you have to pay the I.R.S.  The best part is all of it can be automated, so you never even have to think about it.


Automated Rebalancing allows Robo-Advisors to Buy Low and Sell High

As the Global Markets rise and fall, so will different sections of your stock and bond portfolio.  Robo-Advisors are programmed to keep your portfolio allocations in alignment with your chosen risk profile. The system will automatically buy, sell and re-allocate money to different sections of your portfolio if they get too far away from their intended allocation percentage.  Any new money invested will always re-balance the portfolio prior to selling securities.  Thus, Robo-Advisors reduce the turnover rate of your portfolio which may also lower your taxes. Rebalancing your stock and bond portfolio has always been a strict rule followed by long term investors.  Regular rebalancing forces you to buy more of the securities that have fallen in price while buying less or even selling some of the securities that have risen in price.  This is exactly what all investors strive to do, buy low and sell high.

Leverage our Research and ExperienceRobo-Advisors Are The Future Of Investing

We’re always striving to keep up with the constantly evolving financial landscape and we have spent a lot of time researching several Robo-Advisor programs. Some of the most well-known Robo-Advisors which provide great client-based service are Betterment, Wealthfront, and Charles Schwab Intelligent Portfolios. Some of the less known programs starting to rise in popularity are Acorns, Stash, M1 Finance and WiseBanyan.  The last two programs M1 Finance and WiseBanyan are the two we selected for our personal portfolio. You can read why we chose these two programs in our Robo-Advisor Strategy article.

Here’s a great short video explaining the recent Rise of Robo Advisors

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