What’s a CFP’s take on Robo Advisors?

Many people wonder whether they should go with a robo advisor or a financial advisor for their financial planning needs. When people ask me, a financial advisor, about how I feel about robo advisors, I tell them that robo advisors can absolutely be helpful – but they work best when you use them with a financial advisor.

Robo Advisors are a relatively new financial planning concept, and for many, they make investing more approachable. However, I find that there’s still some confusion around the robo advisor trend and the best ways to utilize them. Let’s clear up what a robo advisor is, and how they can fit into your financial planning journey, with or without, a financial advisor.

What is a Robo Advisor?

If you’re sitting here asking: What is a robo advisor, exactly? You’re not alone.

Robo advisors are a digital program that offers automated investment services. They are usually driven by algorithms, and have little to no interaction with a living, breathing human. Though, many robo advisors have started to offer more human-to-human wealth management services.

Betterment, which launched in 2008, was one of the first robo advisors in the marketplace. Wealthfront, too, launched that year. Both of which are well-regarded services in this space. Since then, many more have cropped up – and some have tailored their experience to a specific group of people or investing experience. Acorns, for example, is geared toward people looking to invest a small amount of money regularly. They round up your purchases to the nearest dollar (or other pre-set amount), and invest the money for you. Ellevest that is designed specifically to help female investors find financial success, is another unique robo-advisor. They offer services targeting women specifically ranging from 401(k) and 403(b) rollovers, to IRA transfers, to private wealth management.

Robo advisors usually run on a predetermined algorithm. To maximize effectiveness, they rely on you to enter all of your financial documents and information. Using the information you give them, such as networth and risk tolerance, they build you an investment portfolio and strategy, and adjust automatically.

What should you look for when choosing a Robo Advisor?

Any time you start looking for an investment manager, you should look for a few specific things:

What funds are available through that investment management service?
What fees are you responsible for?
What services are offered at the price point you’re looking at?

The point of a robo advisor is to streamline your investment management at a rate that makes sense for your budget. If you don’t love the first robo advisor you look at, don’t be afraid to shop around. The goal shouldn’t be to play with multiple robo advisors and to have your investments scattered. Instead, do your research on the front end to find a robo advisor that meets all of your needs so you can maximize the benefits of having an automated investment strategy with a single robo advisor.

“Once I had a substantial emergency fund, I knew it was time to start looking into growing my wealth and wanted to try out a robo advisor because I found it more approachable,” stated Brittney Burgett, communications director at Haven Life. “Ultimately, I decided to go with Betterment after a few recommendations from my colleagues — specifically related to their reputation, user experience, and a promotion they were offering for a fee-free first year of account management. I’m happy with my choice but think that either Betterment or Wealthfront would have been a good fit for me and my needs.”

Robo Advisor benefits

When leveraged with a comprehensive financial plan, a robo advisor can help to automate your investing process. For many people, this is the boost they need to get started investing. Recent studies have shown that less than ⅓ of Americans between the ages of 18 to 29 are actively investing in the stock market. That means a huge chunk of the U.S. population aren’t taking advantage of compound interest that inherently comes with investing – and are missing one of the easiest, best ways to grow wealth.

I often tell clients that the beauty of a robo advisor is that you can set it and forget it. In today’s busy world, that’s a huge benefit. People also like robo advisors because of their low fees and smart algorithms. This makes them much more accessible to the American public, and encourages people who may not have gotten involved with investing previously to take the leap.

Different robo advisors also bring added benefits to the table for investors. They also rebalance regularly to keep you on track to meet long term savings goals, and can adjust to ensure atax-efficientt investment strategy. If you’re currently DIY-ing your investing, or haven’t entered the market at all, automating these “to do” items can help take some of the pressure off your shoulders.

All of these things make robo advisors a positive tool to use in your financial plan. However, just like any tool, robo advisors aren’t all perfect. The systems themselves have some flaws. More than that, the way people rely on robo advisors can be flawed, too.

Robo Advisor drawbacks

A robo advisor is no substitute for human contact. It sounds simple, but the truth is that the majority of financial mistakes I see come from individual investors. You might make a rash investment decision during a large market drop, or you could invest in a way that doesn’t match up with the amount of risk you need to take on in your portfolio to meet your savings goals.

It’s also important to understand that a robo advisor is not the same thing as a financial plan. Although algorithms can be useful, and a “set it and forget it” investment strategy is appealing, it won’t mean anything unless you have a strategy for the rest of your financial life. Financial planners understand that investing is only a small component of your financial picture. That’s why we also encourage smart budgeting strategies, creating a plan to pay down debt, and building a long term financial plan that addresses your goals and values.

Don’t think that I’m knocking robo advisors – I use them myself. With my clients, I sometimes leverage a robo advisor in conjunction with a financial plan. That’s the important part – my clients are receiving both the automated benefits that a robo advisor has and the human interaction, expertise, and guidance that they get from working with me.

What should you look for when choosing a Robo Advisor?

If you’re thinking about signing up with a robo advisor, it’s smart to take a few initial steps to get started.

First, understand what you want from your robo advisor. Every robo advisor is a little bit different, just like every financial planner is a little bit different. You need to find one that meets your needs. Are you looking to rollover an old 401(k), to invest only in one fund company, create a “set it and forget it” auto-investing strategy, or gain access to tools and resources to advance your financial education? Determining what’s important to you from the onset of your search will help you to narrow your options.
Once you know what you want from your robo advisor, you’ll be able to take a closer look at their algorithms. If you have a specific investing philosophy, such as only purchasing value funds or prefer to engage in SRI (socially responsible investing), it’ll be important for you to find a robo advisor whose algorithm supports those goals.
Finally, do some digging when it comes to their fees. Although most robo advisors present fairly straightforward fees that reflect their desire to streamline your investment strategy, it’s still important to know what you’re signing up for. If something feels too high, ask a financial planner. They’ll be able to help you dig through the pile of fee information you’re trying to decipher, and they’ll also be able to help you determine whether or not a robo advisor fees are in line with the services you’re receiving.

A CFP®’s take

A robo advisor has the potential to be a fantastic automation tool when it comes to investing. But, remember that It’s equally important to build a financial plan that goes beyond automating your investments. Planning to pay off debt, creating a budget, and setting savings goals are all keys to your lifelong financial success – and a robo advisor can’t help you with those tasks. Talking to a financial planner, or working to put together your own comprehensive financial plan, can help you coordinate all of your financial life, not just your portfolio.

Mary Beth Storjohann, CFP® and Founder of Workable Wealth, is an author, financial planner and accountability partner working to help clients in their 20s-40s across the country make smart, educated choices with their money. Her recent accolades include the “Top 40 Under 40” by Investment News, “10 young Advisors to Watch” by Financial Advisor Magazine, and “10 of the Best Personal Finance Experts on Twitter.” She frequently appears on NBC as a financial expert and her expertise has been featured in The Wall Street Journal, CNBC, Forbes and more. Opinions are her own.

Haven Life Insurance Agency offers this as educational information. Haven Life does not offer investment or tax advice and encourages you to seek advice from your own legal counsel, investment advisor, or tax professional.