A mutual fund is an investment scheme that is professionally-managed by asset management companies. The scheme involves collecting money from groups of people than investing it in bonds, assets, stocks, and other money markets. On the other hand, genius investors (Robo-advisors) is generally a new financial service characterized by computer-controlled online investment managers. Unlike mutual funds, Robo advisors such as Wealthfront have a minimal human intervention and typically do not have a physical business office.
Robo advisors are generating more returns than an average good mutual fund with a more personalized portfolio at relatively lower fees. According to Wealthfront and Betterment, one of the largest robo-advisors in the market, their returns are over 4 percent higher.
How Do Robo-Advisors Work?
Robo-advising works through four simple stages that include rebalancing, tax-loss harvesting, client portfolio construction on ETFs, and execution. Once you contact a robo advisor like Betterment and Wealthfront, you will be given a simple questionnaire to fill your basic details, including current and expected retirement age, income, and a number of dependants.
You will then be required to indicate your investment profile preference and risk tolerance levels. The system will automatically use algorithms to translate your inputs into a portfolio of ETFs. Exchange Traded Funds (ETFs) are relatively cheaper, have a higher level of risk diversification, and a high degree of liquidity. Execution is handled by the advisor who will ensure you are invested and your portfolio regularly balanced as recommended.
Benefits Of Investing Through A Robo-Advising Company
Reduced cost of services- the system has a greatly reduced human involvement thereby low overhead costs. Unlike traditional wealth managers who charge 1 percent of the asset under management as a fee, robo advisors such as Betterment charge as low as 0.25 percent. As a result, services provided by these firms are relatively cheaper making them affordable to young less-affluent investors.
Convenient, low-level of engagement and higher returns- your role as a client is less engaging. The computer does the donkey work for you. unlike the traditional investment options, robo-advisor experts provide tax-loss harvesting as well as automated rebalancing services. In addition, a genius investor is only a mouse-click away from his portfolio.
Low minimum balance- unlike in the past, low net worth investors now have access to expert robo-advisory management. In fact, robo advisors such as Folio Investing and Betterment has no minimum balance. Generally, robo-advisors have relatively lower minimum investments compared to traditional wealth managers.
There is no single good concept that lacks drawbacks. Some of the shortcomings of robo-advising include;
- Lack of personalization
- It is simple only to a tech-savvy generation; many older investors find it challenging
- No face-to-face interaction between investor and investment manager- those who would prefer having a relationship with their financial advisors may not be able to do so.
It is important to note that even though most robo-advisors offer low-price schedules, a good number are costly. You, therefore, have to be careful before committing your finances. Likewise, not all traditional financial advisors are expensive. In fact, there is a good number whose services are cheaper than those of robo-advisors.
Bottom line, as an investor you are presented with two options to choose from. You need to figure out which investment guidance suits you or your business. Consider writing down your needs and preferences then compare them against what is offered by a financial professional Vs robo-advisor.
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