Automated online investment platforms are a thing of the future. There are financial planners out there who are complimenting their financial planning prowess with such online investment tools to bring greater inefficiencies to their customers. Robo-advisors have made investing easy – even for those who do not have a big investing budget to start with. Besides making it easy to invest, robo-advisors provide many other investment benefits as well, some of which are discussed below.
Robo advisors pride themselves in the ability to provide maximum diversification benefits at a low cost. Most of them use Modern Portfolio Theory (MPT) as the foundation for their investment solutions, as MPT is at the core of modern portfolio management. What MPT has helped popularized is the idea of diversification and doing away of excess risk inherent in correlated securities/assets. As a result, robo-advisors passively manage portfolios comprised of index ETFs and help an individual invest across a number of asset classes. This allows an investor to optimize their portfolios with the professional help of a robo advisor without paying fees so high that would impact long term returns.
2. Tax loss harvesting
It is the selling of securities (ETF in the case of robo advisors) to harvest a loss that could be used to offset capital gains on other securities or income. The proceeds from the sale are then used to buy a similar security or ETF that has risk/reward characteristics close enough to the one sold so that investor portfolio allocation stays the same. As online investment platforms operate 24/7, they are able to significantly lower the costs associated with tax loss harvesting, that would otherwise be expensive for a traditional advisor to perform. This is a great feature offered by robo advisors to enhance returns further without assuming more risk.
3. Goals based allocation
Traditionally, investment management revolved around beating a benchmark, focusing more on how a particular advisor performed in a period and less on a client’s investment goals. Robo advisors, on the other hand, have steered that focus back on the client by offering Goals Based Investing, an investment methodology that aims to help an individual achieve his investment objectives. After all, why does anyone invest at all – to meet some financial obligation or goal in the future, right? So the focal point of investment management should also be aligned with client goals. Robo advisors, such as Betterment, allow you to invest with goals based allocation. By going with this approach, you are forced to plan and save ahead and less likely to incur debt to fulfill a major financial goal as you will have your future liabilities better matched with your assets.
4. Continual education
Robo advisors are there to serve investors from all age groups and investment levels. Therefore, they have created their platforms informative enough for everyone to benefit. They know their typical client likes to take things in his own hands for the most part, so they offer a variety of educational resources, such as
- Articles on investment strategies and investment specific goals
- Investment commentary and insights
- Free courses (not all of them)
5. Automated monthly withdrawals from your account
For people who look for a complete hands-off approach to investing, robo advisors allow automated monthly withdrawals into the investment account. Among the various bills and payments you have to worry about, robo advisors take care of the one that matters for your financial security the most.
6. Factor tilts
Each robo advisor has a different view on how the markets will perform over a given period. Based on that view, each robo offers certain asset classes and sub asset classes for investor portfolios. For example, Betterment differentiates between value and growth stocks and in effect, puts more weight on value stocks due to their above average historical performance in both domestic and foreign markets. An investor, therefore, investing with Betterment can expect a portfolio tilt towards value more than growth.
7. Fractional shares
There are some online investment platforms that offer fractional shares investing. It is a highly effective investing method as it saves your portfolio from cash drag. Every penny of your investment budget gets invested to form an optimal portfolio with an asset allocation based on your unique risk appetite and investment objectives. When you invest, you don’t want any part of your money sitting on the sidelines waiting to get invested as it leads to subpar returns.
There is a growing abundance of robo advisors, which makes the decision of choosing the one that is best for your investment goals and needs a bit challenging. Educating oneself about the possible online investment platforms is the first step. Before choosing a robo advisor, it is worth your time to do your research to pick the one that is best suited to your unique investment needs and goals because you likely don’t want any regrets on your investment journey.