3 questions to ask before using a robo-advisor
submitted by Joe Beckford
If they can manage inboxes, car engines and the climate in a house, then surely they’re capable of overseeing your money. Or at least that’s thinking behind “robo-advisors.” These online platforms use sign-up forms to collect financial information and investing preferences from new investors. They then use those results to assign that person to one of their computer-generated investing models. For some would-be investors, the convenience of this digital solution makes it worthwhile. But before you trust the cloud to manage your money, consider these questions.
Will a robo-advisor offer advice?
Technically, yes. Some platforms use AI to respond to questions about retirement, college planning and other financial topics. And while it may be able to answer basic inquiries, a human advisor will bring a level of creativity and customization that you can’t expect from a robot. Even if the robo-advisor can connect you to a network of flesh-and-blood financial planners, they won’t have the same level of background knowledge that your situation probably calls for.
Will a robo-advisor help you weather the storm?
While you may be comfortable working with a robo-advisor when the market’s up, you may want more than an algorithm to watch over your nest egg when it’s down. According to an Investopedia study, over 40 percent of investors would not want to use an “automated investing platform during extreme market volatility.”
Will a robo-advisor give you better returns?
Short answer – probably not. Just like most reputable human advisors, robo-advisors will invest you in a passive position. However, some of these platforms are starting to experiment with a more active approach. And with many of these robo-advisories still answering to the venture capitalists who helped get them off the ground, more experimentation is certainly possible.
So, should you invest with a robo-advisor? If you’re a young investor with a small portfolio, it’s well-worth considering. However, as your financial needs become more complex, a human touch and intellect becomes quite irreplaceable.