Robo-advisors are quickly becoming all the rage. What used to be considered an alternative is now becoming more and more mainstream. Even Charles Schwab, a big player in the financial industry has jumped on board with Intelligent Portfolios.
There’s no doubt that robo-advisors are revolutionizing financial services and making investing more accessible — especially for younger generations like Millennials.
But can you trust robo-advisors with your investments? Robo-advisors seem like an attractive option with their low fees and easy-to-use technology, but we have very little history to look at in order to determine the fate of robo-advisors.
Will they still be around in 50 years? Time will tell. If you are thinking of switching to a robo-advisor or are currently using one, here are some things to consider.
In the past few years, security breaches have endangered consumers’ personal and financial information. As we live more and more of our lives online, we also increase the risk of our information getting into the wrong hands. Putting all your trust — and money — can be potentially risky.
Luckily, some robo-advisors are putting measures into place to increase security. WiseBanyan recently added two-step verification, where a code will be sent to your mobile phone in order to access your account. In addition, they will lock down your account if there is any suspicious activity.
This is definitely a step in the right direction, but will other robo-advisors follow suit? Look into the security measures that your prospective or current robo-advisor has in place.
One of the biggest concerns with robo-advisors is their actual performance. If you’re going to throw the majority or all of your cash at a robo-advisor, you want to ensure you get a return on your investment and that your money is working for you.
While robo-advisors may market their low fees and high returns, the Securities and Exchange Commission recently released a warning for those who use automated investment tools.
“While automated investment tools may offer clear benefits — including low cost, ease of use and broad access — it is important to understand their risks and limitations before using them. Investors should be wary of tools that promise better portfolio performance,” the release states.
Lack of Human Contact
Though robo-advisors do their best at personalizing their advice to your particular situation and your financial goals, at the end of the day, they are using an algorithm to make big financial decisions.
“If a baby is on the way, no cookie-cutter algorithm can tell you the myriad things you need to do to prepare for the enormous change in your life and how to plan for your young one’s future. If your spouse dies — the life partner who handled all financial matters — a computer screen or a stranger’s voice on an 800 line can’t replace a trusted advisor who lives nearby and can rush right over,” says Larry Light, in an article in USA Today on the downsides of robo-advisors.
It’s also important to consider what kind of emotional support you’ll want during a downturn in the market. The robo-advisor boom is happening while things are pretty good, but how will you — and, more importantly, the robo-advisor — handle a market downturn.
Some robo-advisors offer little information on how to reach an actual person, while others are available via email and maybe, if you are lucky, the phone.
If you want to know if you can truly trust a robo-advisor with your investments, be sure to do your own research and properly vet the company in question. Check out the Securities and Exchange Commission’s Investment Advisor Search.
You can input the name of the firm to see if they are registered. Any firm or brokerage who manages money is required to be registered with the SEC, and this includes robo-advisors.
You can also use BrokerCheck, by the Financial Industry Regulatory Authority (FINRA), to learn more about the firm, their disclosures and more.
In addition, you’ll want to pay attention and check the robo-advisors clearing house. Clearing houses can add an extra level of security and regulation. Notification of clearing houses are often presented in the fine print of disclosures, which can be easy to gloss over. Look at all the fine print, as well as terms and conditions.
What Happens if They Go Under?
While robo-advisors are hot right now, we don’t have the value of history to show us their long-term success. What will happen to robo-advisors when things go awry in the market? Will they still be around in 40 years when many Millennials are ready to retire?
Many robo-advisors don’t seem to answer these questions, but Betterment does acknowledge this frequently asked question and common concern stating:
“In the unlikely event that Betterment was to close, your money would remain safe, and you would simply choose a new home for it. Betterment’s corporate money is completely separate from your customer money at all times, and Betterment is not allowed to use your money to pay for its operations or anything other than investing for you. You own all the underlying securities in your Betterment portfolio, and if you close your account your money will be transferred back to your linked checking account. If we were to close, the funds would be transferred to the broker of your choosing.”
In addition, they state that your accounts are “also SIPC protected (up to $500,000 per account type) against losses resulting from the failure of a broker-dealer. Unlike FDIC insurance for banks, SIPC does not protect against losses due to normal swings in the market.”
Assets Under Management
Another way to determine the value of your robo-advisor is to look at their assets under management (AUM). This can give you an idea of how much wealth they are managing. In addition, look at how many customers they are serving, and check out online reviews for additional resources.
Even so, robo-advisors still seem to be playing in the kiddie pool when it comes to managing wealth.
According to an article on CNBC, “[T]he assets managed by robo-advisors were still only about $4 billion as of October , spread out over 13 key players, according to consulting firm Aite Group. To put that in perspective, consider that the Vanguard Group, the country’s biggest mutual fund company, alone manages assets of $3 trillion. (Yes, that’s trillion with a T.)”
Robo-advisors are making huge advances in the financial services industry and attracting a whole new audience. In many ways, it’s a good thing — low fees, easy access and tax efficiency.
However, it’s key to look at all sides of the equation and really ask yourself if you can trust robo advisors with your investments. Consider how a robo-advisor will help you (or not) from reaching your life goals.
Do you trust robo-advisors with your investments? Why or why not?