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I've been telling you for most of 2016 that financial technology, or fintech, is changing the investing and trading landscape.
One of the most profound fintech disruptors is the creation of automated investment services, more commonly known as "robo-advisors."
The idea of automating investment services was the brainchild of a handful of millennial-focused fintech entrepreneurs, most of whom are millennials themselves.
With their general aversion to traditional fee-based advisory services, their experience of living through the tech-wreck of 2000 and the 2008 market shellacking, their comfort and trust in computers and technology, millennials (the generation born or coming of age between 1982 and 2000) were presumed to be the perfect audience for robo-advisory services.
Sure enough, assets under management by robots (and their human helpers) exploded into the billions this year.
But millennials aren't the only group who are enamored with these low-cost, automated investment services. They're catching on with lots of investors.
If you're not one of those investors, today, I'm going show you how robo-advisors work and what they cost, as well as the pitfalls associated with this newfangled investing horizon.
Let's get started…
Low Fees Are a Huge Incentive
Automated investment services aren't hard to understand, on the surface at least.
Basically, you fill out online "paperwork" including questions about your age, maybe your education level and knowledge or investing experience, your financial situation, your goals, and other pertinent questions that traditional financial advisors or registered investment advisors should be asking you.
Then your data is run through algorithms that determine how much you should invest, what you should invest in, and when to reallocate or rebalance your portfolio.
If everyone was comfortable with robo-advisors there wouldn't be any need for additional human help. But a lot of investors entering into the robo-advisor world want some additional human contact.
So there are different product offerings available.
In fact, there are five so-called automated investment service account types:
- Direct-to-consumer accounts with no human interaction
- Direct-to-consumer accounts with limited advisor assistance
- Direct-to-consumer accounts with heavier advisor assistance
- Traditional services with in-house digital wealth management offerings
- Retirement-specific providers, including both direct-to-consumer and business-to-business providers
As far as fees, they range from low to super low.
Different providers offer different fee structures and several offer multiple structures.
The lowest fee I've seen is 25 basis points, or 25 one-hundredths of one percent. While that fee looks like a come-on fee because it's offered on accounts with less than $10,000 invested, annual fees vary. The basic fee model is an "assets under management" annual management fee, where you pay a fee based on how much money you have parked in your account.
A few services offer fixed annual fees. Some offer sliding scale fees, where the more money you put into your account, the smaller the fee becomes. And most providers offer additional fee-based services if you want some hand-holding that doesn't involve a computer.
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About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.