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Let’s say you have a ton of money ready to invest.
If you’re like me, you probably don’t want to spend all of your time with your eyes glued to a screen actively trading on Robinhood. You want your money to grow, but you don’t want to think about it all the time. You might be scared of the idea of ​​interacting with an investment professional or the fees sound like a lot.
You’re not alone.
A study of 3,000 US adults conducted by vice, a technology-enabled advisor investment management platform exclusively awarded to USA TODAY, found that the biggest barrier to working with an advisor is cost (43%).
Here’s what I did: I skipped the personal investment advisor and got myself a robot to build my portfolio with.
Roboadvisers, digital apps that use algorithms to build investment portfolios, are becoming increasingly popular, especially among young adults who are looking for an uncomplicated and mobile-friendly tool.
You can download an app and fill out a survey about yourself with questions such as age, income, and risk tolerance. Based on these answers, Roboadvisers create a portfolio of stocks and bonds for you to maximize your long-term returns.
These investment vehicles can scale dramatically with low marginal costs as the portfolio is generated by algorithms. By removing the human factor from investing, they can serve millions of customers simultaneously with just a few lines of code.
Many roboadvisers are designed for young investors, especially millennials and Generation Z customers.
Generation Zers, born between 1997 and 2012, began entering the labor market shortly before the outbreak of the COVID-19 pandemic and when the unemployment rate was at an all-time low. As a result, unemployment rates skyrocketed and then leveled off. And those workers are starting to save for retirement at an unprecedented young age, according to the Transamerica Center for Retirement Studies, a nonprofit.
Much like millennials born between 1981 and 1996, these young Americans are plagued with student loans and credit card debt but want to invest and build savings for retirement.
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“Millennials and Gen Z grew up digitally natively and expect to be able to manage their money the same way they order things on Amazon or call a car on Uber,” said Kate Wauck, chief communications officer at Wealthfront, a roboadvising company. “These young investors don’t want to pick up the phone or go to a stuffy office to manage their money.”
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Most investors want a financial advisor but don’t trust robos
Although young investors are familiar with digital tools, the same study by Vise showed that nearly half of Americans (48%) trust human financial advisors, compared to just 11% of Americans who trust roboadvisers.
Two percent of the total participants and 4 percent of the 18 to 24 year olds used Roboadviser. Three percent of the 25 to 49 year olds, 1 percent of the 50 to 64 year olds and 0 percent of the 65 year olds and older had tried roboadvisers.
In contrast, 41% of people over 65 report working with a financial advisor, compared with 26% of Gen X, 17% of Millennials, and 14% of Gen Z.
“People, whether young or old or whatever, trust people, especially their most personal good, namely money,” explains Samir Vasavada, founder and CEO of Vise and himself a member of Gen Z.
Robo options to consider
Despite low adoption rates, there are a variety of roboadvising options depending on your investment goals.
SoFi Invest allows customers to invest with as little as $ 5 and no administration fee, so The RoboReport from the second quarter of 2021. On average, the roboadvisers charged a management fee of 0.35% in the report.
InteractiveAdvisors is another option that provides portfolios for sustainable and socially responsible investing if you value buying from companies that share your values. Betterment also offers a few options for environmental, social and corporate governance (ESG) investments, including Climate Impact, Social Impact, and Broad Impact.
improvement is great for first-time investors with its “intuitive dashboard” and “superb suite of educational tools,” says The RoboReport.
wealth has the best financial planning tools, including home purchase and future net worth modeling capabilities, according to the report.
Axos Invest and SigFig have the best annualized performance according to Nerdwallet data from December 2017 to June 2020.
Other robo advisers aim to transform the financial landscape for new investors, including women. Ellevest, for example, is a women-built robo-adviser tailored towards female investors.
Roboadviser: pros and cons
To be sure, Robot advisor have their fair share of advantages, but also disadvantages.
Roboadvisors tend to charge relatively low prices and use Nobel Prize winning algorithms for your money. Unlike traditional financial advisors, however, roboadvisers aren’t as individually tailored to your specific goals, says Vasavada. They also don’t have a long track record to prove their success.
So far, roboadvisers have mixed annually returns from 1% to 5%, according to NerdWallet.
“I would give roboadvisers about 25 years before comparing their returns to the traditional method,” says Danetha Doe, financial expert and creator of Money & Mimosas, a financial wellness platform.
Despite the uncertainty about roboadvisers, Doe encourages women to invest as early as possible.
“Roboadvisers have made investments accessible to more people. As we move into a more inclusive economy, I fully support people who choose to work with a roboadviser, â€says Doe.
Roboadvisers are highly regulated and are considered safe investment vehicles. They must register with the Securities and Exchange Commission and are subject to the same securities laws and regulations as human advisors. Most of the roboadvisors are also members of the Financial Industry Regulatory Authority, a brokerage regulator and Wall Street self-regulatory authority.
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Vasavada believes the future of the private investment industry lies in a hybrid approach that combines technological solutions like roboadvising with human investment advisors.
On the one hand, advisors need to evolve by integrating technology and tailoring their services to younger investors. On the flip side, roboadvisers are starting to incorporate more human services into their platforms, Vasavada points out.
For example, E * TRADE integrated in a 24/7 online chat on its mobile and web platform, while Merrill Guided Investing Educational resources and financial planning tools added.
“I think the future of the space still rests with the financial advisors. However, I think there is a place for roboadvisers. And I think that roboadvisers will stay here, â€says Vasavada.
Ultimately, the main attraction of roboadvisers is their convenience. You could set one up on a Sunday just by sitting in your bed on your phone, and that’s exactly what I did.
When researching young investors, Wealthfront found that many of them liked not having to interact with anyone.
“We developed our product in such a way that everything can be done directly in our app using software,†says Wauch.
As I am a young investor and roboadvising customer myself, I can only agree.
Michelle Shen is a money and tech digital reporter for USATODAY. You can reach her @ michelle_shen10 on Twitter. She uses Wealthfront as a roboadviser.
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