The young and old generations have a remarkably drastic difference with most things in life. The same holds for their opinions and strategies or investments. Some like to stick to familiar ways while others are excited about new and bleeding-edge technology like robo-advisors.
Hiring a traditional investment advisor, manager or an investment firm can be very costly. Investment advisors are highly trained and skilled professionals who need to manage a lot of high-value clients and get them consistent returns. That’s why they usually charge a commission fee of 1 to 2 percent on every trade.
You may not even get to hire an investment manager if you don’t meet a certain earning ceiling. The numbers get extremely skewed with investment banking. Investment bankers usually manage clients who earn six figures or more. Compared to that, robo-advisors are more democratic. Anyone can use robo-advisor services and their low commissions of 0.2 to 0.5 percent that won’t hurt your ROI.
Robo advisors are also great at offering services that you don’t get anywhere else. For instance, robo-advisors can accurately assess your risk tolerance by combining several data points. They take your financial data, age, existing investment strategies, and many other factors into account to assess your risk tolerance.
For instance, if you are at the beginning of your career, you may have a high-risk tolerance. Young professionals usually want high returns and have a higher risk appetite to handle the ups and downs of the market. Contrary to that, the older generation stays away from market volatility and is more likely to invest in more stable assets to cash in on their retirement plan. After a robo advisor does your risk assessment, it can plan or adjust your portfolio accordingly.
Tax loss management or harvesting is a unique feature offered by robo advisors. With this strategy, securities in your account are sold to deliberately incur losses and offset profits from capital gains. This strategy can help to reduce your tax bracket. However, pulling it off manually is very difficult due to IRS(Internal Revenue Service) regulations.
Investment advisors who offer this service usually charge a hefty sum since it’s a very tedious and labor-intensive process. Robo advisors have an edge with their advanced algorithms and help to reduce your taxes while keeping you compliant with regulations.
Your brand-new car drives smoothly for a couple of years. As time goes by, you need to realign its wheels, change brake fluid, and make several other changes to keep it working in perfect condition. Your portfolio works the same way. It may have been perfect for you at the start. However, your changing priorities and market factors may call for a portfolio rebalancing.
Most robo-advisors offer this feature and let you decide the percentage of securities or assets you want to hold and how often you want to rebalance your portfolio. It’s also important to remember that you don’t set thighs in stone with portfolio rebalancing. You always have the flexibility to buy and sell options and change your strategy whenever you want.
Robo advisors have become phenomenally great at their tasks and can help both amateur and seasoned investors. New investors get to start off their investment journey with new technology and a low minimum investment amount. Veterans get to automate the tedious tasks of managing their portfolios and streamline their investment journey.
Amilia Brown is a seasoned business writer & strategist who simplifies complex business concepts and turn them into engaging narratives. As a trusted business writer, she delivers actionable insights with precision.