How Does the Robo-Advisor Work and What Is It?

How Does the Robo-Advisor Work and What Is It?

March 15, 2019

People who have difficulty managing their finances often turn to financial advisors for help. Yet, however enlightening these advisors might be, their services are far from being affordable to the people who try not to fall into the debt pit or who have already succumbed to the ravages of debt.

When struggling financially, people cannot always spare money for advisers, even if potentially their instructions can get them out of financial dire straits. To bring them out of this oxymoronic situation, where they should pay to learn how to save their money, specialists have invented online software that performs the role of the human financial advisor.

Called “robo-advisors,” this software costs from $100 to $150, and is, therefore, much more preferable, from a monetary point of view, over human financial advisors who charge from $100 to $400 per hour and whose fixed fees climb to $1,000 and even $3,000.

But robo-advisors software is not helpful only to people skirting dangerously close to financial ruin. Those investors who stand firmly on their own two feet can also deploy a robo-advisor to help them select investments, rebalance, and place trades on their accounts.

If you think that this software can be useful for your business, you can read the Betterment review, one of the most popular robo-advisors, and decide whether you need to purchase it. If you hear about the robo-advisor for the first time, read the explanation of its functions and benefits detailed in the paragraphs below.

The robo-advisor is an investment platform advising people about their investments or other financial situations with the help of technology.

To activate it, you need to fill out your personal data, specify what financial aims you want to achieve, and indicate your risk tolerance. Once you have particularized this information, the software will create a portfolio for you, which it will manage on its own, ensuring that it does not deviate from the defined trajectory.

The management of your money is performed through the use of algorithms, and so is the rebalancing of your portfolio. The robo-advisor will also use tax harvesting to minimize your liability to the Internal Revenue Services (IRS). In other words, the software will sell those securities that have suffered a loss.

In doing so, it will offset taxes on your gains and income alike. Having sold the unprofitable security, the robo-advisor will replace it with a similar security and thereby will maintain the best asset allocation and expected returns.

Apart from these functions, the robo-advisor can help people avoid making investing mistakes that may cost them dearly. If you are a person who is swayed by emotions, this platform can be very useful for you.

The biggest problem of the majority of investors is that they often make investing decisions at the spur of the moment. They also become influenced by their emotions when the market reaches its peak or takes the deepest dip. Some people even follow their intuition instead of reason and precise calculations when managing their assets.

Needless to say, no software will be led astray by emotions and gut feelings. When you turn to the robo-advisor for financial assistance, you may stay assured that in investing your money, it will rely solely and narrowly on facts and algorithms and will never make the all-too human mistake of listening to one’s heart.

The robo-advisor also keeps you stress-free.

After you have filled up your details, you will place the business of managing your finances in the hands of the software. Since then, it will automate the whole process for you, allowing you to focus your attention on other parts of your life.

With the robo-advisor, you do not need to worry about making changes to your portfolio and think what sphere is more profitable for investments. The platform will make these and similar decisions on your behalf. What is even more convenient is that you will not need to log into your account and spend time actually trading.

You will also be able to trust the robo-advisor without reservations. With human factors taken out of the equation, you will not need to suspect that the software will advise you wrongly out of spite or driven by desire to increase its personal gain, as people in a similar situation might be tempted to do.

Although robo-advisors are much cheaper than the consultations of human financial advisors, you will still need to pay a service fee, when you use them. Another payment you will make is for expenses of the used investments.

As a rule, the fee you pay is calculated as a percentage of assets, or it may be a predetermined fee. When the payment is fixed, it will largely depend on the size of your portfolio and will range from $15 to $200 per month. If you pay a certain percentage of assets, expect your payment annually range from 15 percent to 50 percent of your account size.

Also note that human financial advisors require about $100,000 as a minimum investment. Robo-advisors never ask for such an enormous amount of money. Your initial investment with the software may be as low as $500.

Most of the online robo-advisors offer a free trial period for new users. If you are still unsure whether this software can help you to reach your financial goals, capitalize on the free offer and get a feel for how the portfolio solution can perform money management on your behalf, before opening an account with any existing popular robo-advisors.

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