Are robo-advisors for beginners worth it? Explore the benefits, drawbacks, and whether it fits your financial goals.
Robo-advisors have quickly become the top choice for new investors in recent years. Low fees, guaranteed bot strategies, and layman platforms promise you a process that otherwise can feel like a heavy-duty machine. But are they really the solution for rookie investors, or are there some drawbacks that not many people talk about?
In this article, we compare the benefits and the drawbacks of robo-advisors for beginners so that you can determine whether this innovative tool is the right fit for you.
What Are Robo-Advisors?
Robo-advisors are mathematical tools that help in portfolio management through automated processes. Rather than meeting face-to-face with a financial advisor, you open an account, answer some questions about your goals and appetite for risk, and the software takes it from there!
Since robo-advisors provide lower costs and fewer barriers to entry compared to traditional financial advising, this can be an appealing option for new investors. Services such as Betterment, Wealthfront, and Charles Schwab’s Intelligent Portfolios have become popular with first-time investors.
For better or for worse, though, robo-advisors have their pros and cons to know about before jumping into the technology itself.
Benefits of Robo-Advisors
Lower Fees
A typical financial advisor could charge you around 1% of your assets per year, while robo-advisors are infamous for their low fees. The lion’s share of these platforms—like Betterment and Wealthfront—charge 0.25% or less, and many even offer free services under certain conditions.
This cost-saving feature attracts beginners with limited capital who do not have to pay hefty fees or commissions for professional-level portfolio management.
Ease of Use
The all-rounder robo-advisors allow for tremendous usability in regard to beginners. Account opening is easy and quick on most platforms, and some platforms do not have any minimum balance requirement. Even inexperienced investors can splash their toes in the water by starting with just $1 worth of investment.
Furthermore, the majority of robo-advisors offer user-friendly interfaces and automated plans, enabling you to invest without having specialized knowledge of the stock market or financial jargon.
Robust Investment Strategies
Most robo-advisors employ some sort of algorithmic approach based on investment theories that have won Nobel Prizes. The whole point of these strategies is to maximize your returns while minimizing your exposure to risk—perfect for newcomers to investing who have never heard of portfolio diversification.
As an example, Betterment utilizes modern portfolio theory to disperse your funds across different ETFs and offer goal-based portfolios.
Automation and Efficiency
Robo-advisors do it for you—they will rebalance your portfolio, harvest losses for tax purposes, and free your time, while also removing the emotional decision-making that often makes investors hesitate to sell before the last of their stocks—a common fallacy.
For novices looking to practice investing without having to deal with the stress of micromanagement, this hands-off method is a boon.
Low Barriers to Entry
Most robo-advisors have low or no account minimums, making them accessible to investors with even small amounts of money to invest. The inclusiveness of it resonates with Millennials and Gen Z, who are starting to grow their wealth.
Drawbacks of Robo-Advisors
Limited Personalization
Robo-advisors do great at broad-strokes investment strategies, but they lack specialized advice. They probably won’t deal with particular objectives such as saving for a child’s education or complicated estate planning.
The lack of a personal touch can be a major negative for beginners in search of help since everyone has different financial needs.
No Human Interaction
One of the biggest drawbacks of robo-advisor services is that they are fully algorithm-based and therefore there is no human advisor to lean on during tough market environments. Without this emotional support, first-time investors can feel exposed.
Limited Flexibility
Robo-advisors are passive investment vehicles that primarily employ ETFs and index funds. This would work for long-term, passive investment but not for people who want to invest in individual stocks, sectors, or intricate strategies.
Hidden Costs
Although robo-advisors may have low management fees, the actual expense ratios for ETFs and other investment products can be significant. For instance, Betterment has a $4/month fee on balances under $20,000, which could be high for a tiny portfolio.
If not monitored closely, these hidden costs can chip away at returns for beginners.
Dependence on Algorithms
Algorithms are mechanically sound—but not sound mechanically. They are not adaptive to new market environments because they are based on historical data.
As was evident during the times of the COVID-19 pandemic, a number of robo-advisors faced portfolio management challenges, which exposed their limitations.
Should Beginners Use a Robo-Advisor?
For newcomers, robo-advisors provide an uncomplicated path into investing. They are simple, cheap, and accessible—just the way to start with personal finance. But they are not free of downsides.
New investors should assess whether robo-advisors fit their financial objectives. If low fees and automation are your top priorities, robo-advisors might be the way to go. But if you want more control over your portfolio or personalized guidance, you may want to look elsewhere.
Being able to cut through the jargon of investing makes robo-advisors a great option for some, but they can offer different services than what everyone needs. Understanding their inherent strengths and weaknesses will help you determine if robo-advisors fit your long-term financial goals and lay the foundation for investment success.
