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.
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.
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 kids 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.
Automated-advisors are available 24/7.
Efficiency and Convenience
Need to make a trade or a change? No need to 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.
More Affordable Initial Investment
SoFi, for example, allows investors to start an account with as little as $100.
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 like SoFi Invest® prefer to work with investors with less than $100,000.
Win up to $1,000 in free
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
Working Solely with Index Funds
SoFi invests your money in Exchange Traded Funds (ETFs) that follow over 20 indexes. 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 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, 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.
Humans, of course, are able to deal better with the clients stress and uncertainty the 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.
SoFi has taken the best of 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.
Since SoFi advisors are paid a salary, not a commission. They’re 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.
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 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 automatically rebalances your investments and 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.
We keep the minimum investment amount low and affordable: just $100. There is no minimum holding period and you can withdraw your money at any time. Keep in mind that while you can withdraw from a SoFi Invest account without penalty, prematurely taking money out of a retirement account, like an IRA, may come with financial consequences. 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.
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.