It's 2015. Computers are everywhere. But would you let them make investment decisions for you?
That's the premise behind robo-advisors, and they're the next big thing in retirement planning, according to analysts.
The rise of robo-advisors
Robo-advisors work by users punching in their savings goals and then an algorithm kicks in with a recommended investment strategy. Then, over time, the service will automatically balance and re-allocate funds as needed.
Firms offering robo-advisory services include a mix of big names and smaller start-ups:
- Charles Schwab Intelligent Portfolios
- Vanguard Personal Advisor Services
David Weliver, founder of Money Under 30, says one appeal of robo-advisors is their low cost and the minimal amount of money needed to begin investing, as low as $5 a month.
A report from consulting firm A.T. Kearney estimates 0.5 percent of investable assets will be managed by robo-advisory firms this year, then jump to 5.6 percent by 2020. About 7 of 10 of households say they are at least somewhat likely to use a robo-advisory service in the future.
While the firm notes early robo-advisory services adopters are often more sophisticated investors willing to take risks, subsequent waves of users are expected to include a larger percentage of novice investors.
Giving options to those who had none
Chris Costello, certified financial planner and CEO of Blooom, said robo-advisors aren't just about lowering investment costs. They also provide options to customers locked out of traditional financial planning methods because their portfolio value doesn't meet advisors' required minimums.
"The biggest thing robo-advisors are doing is giving help to people who never had help before," Costello says. "It feels really, really good to do for clients with $3,000 in their account what I used to do [as a financial planner] for those with $3 million in their account."
Most robo-advisors work with brokerage or individual retirement accounts, but Blooom is unique, focusing on maximizing 401(k)s. The company's algorithm analyzes available plan options, then selects the best investments based upon expected retirement date and even price. Every 90 days, the algorithm reanalyzes options to see if the plan added any better choices. The service costs $1 a month for those with a 401(k) balance lower than $20,000 and $15 a month for higher balances.
Blooom isn't the only company with a distinct angle on the market. Acorns allows users to begin investing with only $5 and can round-up purchases so spare change is redirected to retirement savings.
When a computer isn't enough
Robo-advisors may make it easy to invest, but Weliver says you can't expect them to do everything, suggesting people with no exposure to basic investing principles may want guidance from a personal advisor.
"Robo-advisors are for those who don't want to know anything about investing," he says, "but you still need to have some knowledge."
Some advisory services may want to know a user's risk level or preferences to split their money between stocks, bonds or other investments.
A human touch is also useful for those with multiple savings goals.
"The downfall of [robo-advisors] is, by design, it's a one-size-fits-all solution," Weliver says. "A financial advisor can create a much more personalized approach."
That approach could look at tax implications, consider both mid and long-term goals and incorporate strategies to maximize Social Security.
Getting a personalized approach to investing is great, but only if you qualify for it. Compared to firms that insist on big portfolio balances for their clients, robo-advisors offer an opening to those who otherwise would be left on their own with investment management.
"It's not a question of why would someone want to use a robo-advisor," Costello says. "It's, 'Thank goodness they are available.'"
Tell us: Are you thinking about or already using robo-advisors for your retirement savings? Let us know why you want to employ this technology or what your experience with robo-advisors has been like.
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