Many experts predict that robots will soon take over jobs across many industries.
And this trend is certainly evident in the financial industry, where robo-advisers (an automated online service that provides algorithm-based portfolio management without any involvement of human financial advisers) are already taking over a substantial portion of investment management. By the end of 2015, U.S. robo-advisers managed an estimated $50 billion in assets. That value is expected to rise to $2.2 trillion by 2020.
With major investment fund firms, such as Vanguard and Fidelity, deeply in the robo-advice game, many individual investors will need to decide whether to hire the services of a robo-adviser. So, let’s review nine key questions you should ask before you trust your money to a “bot.”
1. Am I Eligible for a Robo-Adviser?
While robo-advisers are gaining in popularity, not every single retirement plan or investment house is offering them as an option. Some retirement plan advisers eschew automated portfolio management to differentiate themselves from the competition. This means that your current employer-sponsored retirement account or investment account may not offer robo-advisers.
Even when a robo-adviser is available, you may not be have enough money in your investment account or nest egg to make use of them. Depending on your preferred broker, robo-advisers require a minimum investment balance of anywhere from $10 (WiseBanyan) to $50,000 (Vanguard). There are companies that don’t ask for a minimum, but you should evaluate whether opening a separate investment or retirement account makes sense for you.
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2. What Services Do You Offer?
Just like human financial advisers, not all robo-advisers are the same. Automatic portfolio rebalancing and tax-loss harvesting (selling securities that have experienced a loss to offset taxes on both gains and income) are among the most common services. Additional offerings vary, and may include advice for retirement accounts and access to a human financial adviser. To have a clear picture of all of your options, be sure to review all the disclosures and terms.
3. What Are the Fees?
The main driver behind the shift toward automated wealth-management is the promise of lower fees. After all, hiring the professional investment management services of a human financial adviser can cost from 0.25% to 1.0% of your account balance. On the other hand, with a robo-adviser you can pay as low as 0.15% of your account balance (using Betterment) or a flat monthly fee of $5 (using blooom).
Be aware that some robo-advisers may charge you nothing for portfolio management, but still send you a bill for applicable trading expenses. For example, WiseBanyan and Charles Schwab Intelligent Portfolios provide free portfolio management free of charge, but invest primarily in exchange-traded funds (ETFs) with moderate to high expense ratios.
4. What Information Do You Need From Me and How Do I Update It?
A robo-adviser is an automated tool that makes investment decisions based on your response to questionnaires and selection of investment criteria. Your input directly affects the actions of the robo-adviser, so develop a crystal clear understanding of the intake process, set of available answers to each question, lead time to process an update, and window of opportunity to make changes. Additionally, ask who you can contact in case you don’t understand a question or term.
The Securities and Exchange Commission (SEC) recommends checking with the company whether the questionnaire actually allows you to customize services or forces to fit you into the tool’s predetermined options.
5. What Are the Key Assumptions?
This is one of those times that you must read the user’s manual in full detail. Every robo-adviser operates within a set of predetermined investment guidelines and economic assumptions. For example, some may limit their trades to low-cost index funds and others may assume an inflation rate of 3% per year. Depending on the assumptions, your fund can have a very different outcome from the one that you expected. Ask for documentation regarding the investment methodology, set of economic assumptions, and list of trading guidelines. The main objective is to spot potential assumptions or guidelines that you’re just not comfortable with at all.
6. What Are My Investment Options?
Just as when you hire a financial adviser or financial planner, check for the pay structure of a potential robo-adviser. Some investment houses may limit your investment options to only those from the same investment house, or worse, may receive kickbacks for purchasing specific financial vehicles. Still, you can have a robo-adviser that only trades with a limited set of securities and meets your unique investment needs. To be able to compare apples to apples, find out what the investment options are of any robo-adviser that you’re considering.
7. Can the Robo-Adviser Offer Me More Later?
A robo-adviser can be a useful tool for individuals who are just starting to invest, have a low account balance, or have straightforward financial needs. As your account balance grows and your financial situation changes, you may need more advanced wealth management services, such as taxes, retirement planning, cash flow management, or estate planning that can be beyond the scope of your current robo-adviser. Finding out the service tiers of a robo-adviser is also an important criteria so you determine whether or not your robo-adviser can “grow” with you.
8. How Do I Terminate the Contract?
Understand the details of how to end a contractual relationship with the firm and how long it may take to cash out any investments if you decide to stop using the tool. For a robo-adviser involving retirement accounts, inquire about the applicable terms and conditions, if any, for a rollover to an external retirement account.
9. How Do You Protect My Personal Data?
Last, but not least, remember that you’re going to access an online service. Check for the steps that the company takes to protect your personal data and the policies in case of a security breach or phishing attempt. Also, ask whether or not the company shares your information with third parties. If so, ask who those parties are and how you can opt out of having your information made available to those parties.