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Automated Investing 101

December 18, 2020 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Automated Investing 101

You want the future 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.

What is Automated Investing?

Automated investing is when computer algorithms generate tailored financial planning or retirement advice to individuals. Automated investing, also known as robo advisors, tends to feature rock-bottom fees, lower minimum balances, digital interfaces and a more hands-off approach to investing.

How Does Automated Investing Work?

1. An automated advisor platform collects information from clients via an online survey.
2. Client’s data includes information about financial situations, risk tolerance and goals.
3. The automated advisor uses this data to recommend a set of investments.
4. Automated advisor may handle portfolio rebalancing and tax loss harvesting if client chooses these services.

Automated investing has changed the financial planning game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client. Call it disruption.

The automated investing industry is currently going supernova: client assets managed by automated-advisors are estimated to have hit $1.4 trillion in 2020 and are projected to reach $2.5 trillion by 2023.

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 quickly find out what we mean. The reason the cost of automated advising is lower: less human labor. Human advisors require salaries and benefits. With automated investing, a proprietary computer algorithm takes time and money to be developed but can be replicated.

Automated investing fees are usually a percentage of the assets under management. Typical fees range between about 0.20% to 0.30% annually. So if an investor puts in $1,000 into an automated investing service, they generally pay between $2 and $3 per year. Some automated investing services even have no management fee. The minimum balance by the client could dictate the fee rate.

In comparison, a reasonable rate for a human financial advisor would be a 1% fee. This would include any fees on the investments a client makes.

Some automated investing services may have a set-up fee as well however. The ETFs that get invested in could also generate transaction costs that the consumer is responsible for. Those using automated investing should also study the tax implications.

Efficient & Convenient Access

With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated-advisors use digital platforms. This allows for clients to ask questions and access help 24 hours, seven days a week if needed.

Need to make a trade or a change? No need to call to schedule an appointment, fill out physical paper, or meet with an advisor in person, or wait for office hours. Usually a few button pushes can do the trick. Lower fees and minimum balances have attracted millennials to the automated investing industry. But the digital and mobile platforms offered by many of these services have also made younger users turn to such robo-advising services more.

More Affordable Initial Investment

SoFi, for example, allows investors to start an account with as little as $1.

Some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million. On the contrary, automated-advisor services like SoFi Invest® can easily work with investors with less than $100,000.

Because of the lower initial investment required, younger consumers have turned to automated investing as a way to plan for their financial future. Previously, high minimum balances had been gates to individuals in the millennial generation getting financial advice.

Now as millennials start hitting life milestones like getting married and saving towards a house, automated investing may be a good option for them to start saving.

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. That’s where the SoFi Invest automated advisor can be a big help.

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

Your SoFi Invest 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 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 makes all the difference when it comes to personal finance. That aspect has not changed, and probably never will.

Investing With SoFi

SoFi has taken both worlds — man and machine — combining the efficiency of automated investing with the added perspective of a real live human financial advisor.

We call our service SoFi Invest, where we make the most of the hybrid between automated-investors and human financial advisors. The humans are on standby when you need them, to help you devise and manage a plan and answer questions. Your resulting roadmap is a mix of automated investing and professional advice.

SoFi advisors are all credentialed and want to help you achieve your financial goals. The pricing is simple and straightforward so that you always know what you are paying up front.

SoFi Invest Automated Advisors

Here’s how it works: a SoFi Invest advisor (who is an actual human being) connects with you personally, helping you to map out a plan, and shows you how to stick with it. We know that risk is stressful on you and your hard-earned money, so we try to figure out ways to reduce some of the risk of your portfolio by investing in a wide range of assets.

In the meantime, SoFi Invest provides you complimentary access to our financial advisors. When the markets fluctuate and change, you don’t need to worry about rebalancing your portfolio, because we’re already on it.

There is no minimum balance requirement But be sure to consult a tax advisor or attorney before withdrawing from a retirement account.

The ultimate goal is to have a realistic and reasonable plan and commit to it. The plan should serve your long-and-short-term goals, which could involve anything from starting a family to buying a house to saving for retirement.

The plan should involve learning more about the world of investing and its nuances and complexities. The more attention you pay to it, the more attuned you become to it. Your senses strengthen, and your confidence can build.

Ready to get started? Opening an account with SoFi Invest is fast and easy. And it’s a great way to help put your cash to work.
 


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: 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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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