Automated investing by ‘robo advisors’: Breaking it down

For people who feel ready to invest, but don’t know how to start, automated investing is a great option

There’s no question that automated investing, or “robo advisors” are on the rise. Initially designed by small tech start-ups, today bigger firms have entered the space and launched their own accessible, low-cost platforms. We think this trend will only continue to grow. Based on a recent study, Business Insider estimated that by 2020, robo advisors will account for more than $8 trillion in global assets under management.

So, what exactly is automated investing? Well, it’s essentially what its name implies – it’s a computer-based investment model. This means that while there’s minimal human interaction, there is, at least initially, an advisor behind the scenes creating the investment models. While customization is very minimal, with most automated investing platforms, an investment model is recommended based on an individual’s answers to a series of questions. After completing these questions regarding your age, desired retirement age, how you feel about risk, your goals and your experience with investing, the platform then recommends a model based on your answers. Most robo advisors use ETFs (exchange-traded funds) as the vehicle to create the model. If you decide to move forward, any money that you invest will then be placed into the recommended asset allocation.

The primary way in which these platforms differ is that the associated firm will then select the investments that fill that allocation model. The frequency in which the firm reviews the allocations also varies. Recently, Charles Schwab’s Intelligent Portfolio became the largest robo advisor. Their platform looks at the allocation once a year. It’s managed, but not in the same way that a traditional full-service portfolio is.

Wondering if you should ditch your full-service account for a robo advisor? We feel that robo advisors aren’t great for people with large portfolios – in our opinion; you just can’t get the level of support and customization you need or have the opportunity for growth. If that’s you, we still feel that traditionally-managed accounts are still a better option.

So, who are they good for? Previously, unless you had a sizeable amount to invest or were comfortable managing your assets yourself, your options were limited and the service was almost nonexistent. We feel that automated investing is a great option for people who are just starting out with investing and don’t yet need that customization in their portfolio. Automated investing is easy to use, it’s low cost, and it’s great for those who prefer an online experience. For people who feel ready to invest, but don’t know how to start, automated investing is a great option.

If you like the idea of a robo adviser but you want a little more support, customization and service, many firms are launching hybrid platforms to provide this. Sustainable Wealth Management, Inc., a registered investment advisor based in Vancouver, is one of them.

Todd Pisarczyk is the founder of Vancouver-based investment management and financial planning firm Sustainable Wealth Management. To learn more about automated investing and how to get started, he can be reached at 360.597.4570.

The above comments are based on the current market environment and are not intended to be a forecast of future events or be relied upon as an investment recommendation.

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