Do you want the future of investing happening right this minute? You got it. Automated investing is the au courant name given to digital platforms that offer automated financial planning driven by algorithms. That means that little or no direct human effort is needed.
How automated investing works
First, an automated advisor platform collects information from clients via an online survey. That data, which includes info about financial situations, risk tolerance and goals, is used to recommend a set of investments.
Needless to say, automated investing has changed the game in fundamental ways. Like so much else that has happened during the digital revolution — particularly the fintech revolution — automated investing has eliminated the middle man and is delivering a service directly to the client. Yep, call it disruption.
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The automated investing industry is currently going supernova: client assets managed by automated-advisors topped $60 billion at the end of 2015; it’s projected to reach $2 trillion by 2020.
Business Insider reports that consumers are very receptive to automated-advisors, thanks to the ease of use. BI Intelligence found that 49% of high-net-worth individuals (HNWIs) worldwide would consider letting an automated advisor manage at least some of their wealth.
Here’s where automated investing gets technical. Most automated advisors use Modern Portfolio Theory (MPT) to create and manage the asset allocation of a portfolio. The idea is to decrease your risk by diversifying into all kinds of assets. It’s a good way to “not put all your eggs in one basket.”
Of course, the automated investing phenomenon is relatively new; its growth has spurted only over the last decade, so it’s difficult to report a long-term industry-wide track record. However, the benefits of using an automated advisor are becoming increasingly clear.
The benefits of automated investing
Let’s dive into some of the benefits of automated investing.
Low-cost process
If you start pricing traditional financial advisors, you’ll find out what we mean, quickly. The reason the cost of automated advising is lower: less human labor.
More access
Automated-advisors are available 24/7.
Efficiency and convenience
Need to make a trade or a change? No need to fill out physical paper, meet with an advisor in person or wait for office hours. Usually, a few button pushes can do the trick.
You Don’t Have to Start Out Wealthy
Many human financial advisors won’t pay any attention to you if you have less than $100,000. On the contrary, automated-advisor services prefer to work with investors with less than $100,000.
Questions to ask a human financial advisor before the automated-advisor goes to work
What is my goal and how do I get there?
Your answer may not be a basic one, in black and white — it may need a little conversation and further fine-tuning. An automated-advisor may not be able to immediately help you with the finer points of buying your first home or saving for your child’s tuition.
I’m not a financial wizard or investment expert, so where do I start?
Having a business degree or advanced financial education is not required to excel in automated investing. SoFi offers helpful tools to help you figure out how to plan for your investing goals, and a financial advisor can help you make sense of them.
How an automated-advisor can help you
Working solely with index funds
Index funds usually follow major financial indexes like the S&P 500 or the Dow Jones Industrial Average. The automated-advisor can get you invested in ETFs without the high fees typical of human advisors.
Some financial advisors at brokerage firms may prefer to invest in more complicated and risky ways, like high-fee mutual funds, and various stocks and bonds. However, investing solely in index funds can simplify your investing strategy, while still allowing you to diversify.
An automated-advisor can automatically adjust and rebalance your account
Your account will consist of a certain percentage of stocks and a certain percentage of bonds; for example, 75 percent stocks and 25 percent bonds. With time, though, your portfolio may change and knock that ratio off balance — too much of one and not enough of the other. No sweat for the automated-advisor, which can rebalance your account back to its original 75/25 ratio. No human interaction needed; the rebalance happens automatically.
The one key aspect that automated advisors and human advisors share: registration requirements. An automated-advisor, despite its lack of humanity, must be registered with the U.S. Securities and Exchange Commission. That makes the automated-advisor subject to all the same securities laws and regulations that a human advisor must follow.
Also keep in mind that assets managed by an automated-advisor are not insured by the Federal Deposit Insurance Corporation (FDIC), the way traditional checking and savings accounts are insured. That’s because your money is invested in the stock market and isn’t sitting in a bank deposit account.
U.S News and World Report predicts it’s likely that in the future, automated advisors without access to human advisors will falter as consumers demand a human financial guide.
Humans, of course, are able to deal better with the clients’ stress and uncertainty that may come with automated investing; one-on-one communication and guidance still make all the difference when it comes to personal finance. That aspect has not changed, and probably never will.
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SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Diversification can help reduce some investment risk. It cannot guarantee profit or fully protect against loss.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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