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For newbie and hands-off investors, robo-advisors are one of the best ways to handle your investments. They’re enticing with low fees, friendly user interfaces, and minimal work on your part.
If you’re just getting into investing and want to explore all your options, you’ll want to know what a robo-advisor is and if getting one is the right fit for you.
What Is a Robo-Advisor?
A robo-advisor is an automated investing software that uses your personal investing information to make investment decisions on your behalf.
“The first robo-advisor to hit the market was Betterment in the aftermath of the Great Recession,” says Riley Adams, a CPA, senior financial analyst at Google and owner of Young and the Invested. “The company pioneered the idea of asking their users questions and making investment portfolio decisions based on these answers and the goals they have.”
Over the last nearly 15 years, other companies have popped up or created robo-advisor branches to already existing firms. For instance, Fidelity has Fidelity Go, its robo-advisor offering alongside its traditional advisory platform. Betterment, Wealthfront, and Ellevest all began as robo-advisor-only firms.
How Robo-Advisors Work
When you sign up with a robo-advisor, they all start with some basic questions about you, like how old you are, your investment goals, and how much you can reasonably contribute to your account. Based on algorithms or mathematical rules and formulas, the tool determines an appropriate model for your investment portfolio based on your needs and preferences.
“A robo-advisor platform has an initial data gathering process where you answer questions related to your finances, risk tolerance, and timeframe,” says Cassandra Kirby, private wealth advisor at Braun-Bostich & Associates, a financial advisory firm.
Using software, the robo-advisor puts together your entire investment portfolio within a few minutes. You can do it without ever talking to another human. This is one of the most appealing parts.
“One of the best ways to outperform the stock market is through not making mistakes when everyone else does,” Adams says. “Often, emotion drives these mistakes. Robo-advisors don’t fall prey to emotions, instead relying on programmatic investment elections and asset allocations.”
Some people like the idea of working with a human to get tailored, specific financial advice. But it’s not required to get started or even have an ongoing relationship with your investments. A common barrier …….