- You probably wouldn't trust a robot to babysit your kids,
or write you a prescription, or even cut your hair.
So why should you trust one to manage your money?
- Robo-advisors have been steadily gaining popularity
since their introduction in 2008,
with total client assets now exceeding $1 trillion
and expected to be $2.9 trillion by 2025.
- That's a lot of money
to put under the care of a bunch of machines.
Let's hope they don't become self-aware
and use it to finance the great robot uprising.
- Despite the name, there are no actual robots involved.
The term robo-advisor refers to algorithms
that automatically manage an investment portfolio
based on your financial situation and goals.
These are tools that financial experts
have had access to for decades
but are now available to anyone.
- There are dozens to choose from,
like Betterment, Wealthfront,
and most traditional brokerages
are now offering their own versions.
But should you use one?
And how can you know which one is right for you?
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Much like a human financial advisor,
a robo-advisor will begin by asking you
a bunch of questions about yourself.
How much do you make a year?
How much do you have saved?
How much are willing to invest?
What are you saving for?
Retirement, a house, your kids' college?
How much risk can you handle?
It uses that information to build an investment portfolio
mathematically engineered to meet your goals,
and continually updates it as the market changes.
- One of the biggest advantages of robo-advisors
is their low barrier of entry.
Most human advisors charge an annual fee
of around 1-2% of your total account balance
and require a minimum investment
in the hundreds of thousands of dollars.
Robo-advisors, on the other hand,
typically charge less than half of that,
and most have extremely low to no balance requirements.
- How can they afford to do that?
By automating tasks that are difficult
and time consuming for humans to do?
Two of the major ones are rebalancing
and tax-loss harvesting.
- In finance, rebalancing refers
to the buying and selling of assets
to maintain a certain level of allocation or risk.
Let's say you and your financial advisor
decide that your optimal investment strategy
is to have 30% in emerging markets,
30% in traditional blue chips, and 40% in government bonds.
If your emerging market stocks rally,
it will throw off this balance,
and your advisor will sell some off
and reinvest it in other their categories
to get you back to your desired ratio.
- Of course, selling stocks at a profit
incurs a capital gains tax,
and that's where tax loss-harvesting comes in.
By strategically selling other stocks at a loss,
your advisor can offset the gains
and minimize your tax bill.
Because the practice can be abused,
the IRS has very strict rules
about how and when it can be done.
- Rebalancing and tax-loss harvesting
are both powerful tools
for getting the most out of your portfolio.
They're also a big pain in the butt,
which is why many human advisors
will only do them for you once a year.
But robo-advisors can do them every day,
finding opportunities and strategies
that no human eye could see.
- The downside of this automation
is that you have little to no control
over which stocks you own.
Robo-advisors are solidly based on modern portfolio theory,
which states that the best strategy for most investors
is to diversify their portfolio to just match the market.
But if you're the kind of investor
who wants to try to beat the market
by picking individual stocks,
then a robo-advisor won't be enough for you.
Instead, you might use a trading app like Robinhood,
which lets you buy individual stocks
while avoiding the usual fees and minimums.
But be warned: while a few have made fortunes this way,
like Warren Buffet,
the vast majority of such investors underperform the market.
- Another reason you may not want to rely on a robo-advisor
is if you have very specific or complex financial needs,
like estate planning or an unusual tax situation.
Though they've become much more sophisticated
over the last decade, they're still designed to fulfill
pretty basic investment functions.
- Some people also want the human touch
that comes with a flesh-and-blood advisor.
Money is, after all, a highly emotional topic.
Advisors do more than crunch numbers;
they listen, they educate,
they help you understand what your goals really are
and how much risk you're really willing to tolerate.
A robo-advisor won't be there to talk you off the ledge
when the market is having a bad day.
- Still, for those who are just entering
the world of investing,
robo-advisors are a sound and cost-effective tool
that has opened the door to millions of people
who are essentially excluded
by high fees and balance minimums.
- If you're thinking about using one,
it's pretty easy to compare rates and services online.
Make sure they offer rebalancing
and tax-loss harvesting at no additional cost.
If you want your portfolio to reflect your values,
you can find some that allow you to prioritize
socially responsible investments.
And if you still crave the personal touch,
many online brokerages now supplement your robo-advisor
with a human advisor
for much less than they would traditionally cost.
- But remember that technology is constantly evolving.
Robo-advisors can spare you
from having to watch your portfolio every day,
but you should still know how they work
and what changes are on the horizon.
- Advancements in AI are expanding
what areas of financial planning can be automated,
and you should research any new services before diving in.
- That said, so far they've been doing a pretty good job
with basic investments, so if that's your need,
you can feel safer with a robot handling your portfolio
than a pair of scissors.
- [Both] And that's our two cents.
- Before you go, could a blind gamer
beat you in Mortal Kombat?
Have you ever heard of the gay rodeo?
And why are these guys putting underwear on goats?
- [Philip] "Subcultured", a brand new documentary series
from PBS, answers those questions and so many more,
exploring lesser-known communities and folks
that have had a major impact on the mainstream.
- Check it out over on PBS Voices, link in our description,
and let them know that "Two Cents" sent you.
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