In the past, when a potential investor was ready to jump into the market, it typically meant sitting down and talking to an investment advisor—a human one—about their financial situation and goals.
That’s still an option today, but investors now have another option to consider—and that’s a robo advisor, also called an automated advisor.
So, which type makes sense?
There is no one right answer for everyone, so this post might help guide investors through the decision-making process, providing answers to questions like:
• What is financial planning?
• Why is investing such an important part of a financial plan?
• What does a financial advisor do?
• What is a robo advisor?
• Robo advisor versus financial advisor: Which is a better option?
What Is Financial Planning?
At a high level, financial planning involves setting personal monetary goals, which can include saving enough money for a down payment on a house, funding children’s college education, and saving for retirement.
With those goals in mind, the next step might be to determine what resources exist to help reach those goals—meaning income, the amount of money currently in savings accounts, employer-based retirement accounts, and so forth—along with current debts and monthly payment commitments.
Financial planning involves looking at today’s financial situation as well as predicting the resources that might be needed to meet financial commitments and to live a desired lifestyle in the future—and then creating a plan to reach these unique goals.
Many times, people decide to seek advice on how to structure their finances to meet their goals.
Why Is Investing Such an Important Part of a Financial Plan?
When investing, one of the foundational goals is to create financial stability, which is at the heart of every financial plan. Investing is different from saving, though, and here’s how:
• When saving, this involves adding money in increments to a savings account. This may be an emergency savings account or one created to save up for a down payment on a house or to fund a dream vacation. Savers will likely receive interest on the balance in their accounts, although not necessarily a large percentage. When people save, it’s often to reach shorter-term financial goals.
• When investing, this involves taking a percentage of available funds and buying assets with it. This may include stocks and bonds, mutual funds, and so forth. When investing, it’s typically to reach long-term goals and sometimes as a strategy to build wealth.
Once a person reaches the point where they have enough money in a savings account for ongoing expenses and for emergency situations (perhaps three to six months’ worth of income), then they may decide to begin investing—and that’s when it can make sense to compare and contrast robo advisors and human financial advisors.
What Does a Financial Advisor Do?
A financial advisor may sit down with clients and learn about their financial situation, including their goals, amounts of money to invest, future income expectations, and more.
Using this knowledge, a human advisor might create a personalized investment plan that could help clients along their path of achieving financial goals.
Depending upon the advisor, they may continue to monitor the success of a client’s portfolio and make recommendations to adjust its makeup when that seems wise.
Financial advisors have been the traditional path for investors to take when needing guidance over the years, and many people still choose that route. Now, here is an explanation of a newer option: robo advising.
What Is a Robo Advisor?
Robo advising technology began to emerge in 2006, with more advanced versions becoming available just a couple of years later. And, as this type of automated advising technology became more sophisticated, increasing numbers of people began to use it.
A robo advisor, or automated advisor, is a software application that uses algorithms to provide investment recommendations. This technology can:
• “Understand” investment goals
• Factor in an investor’s timeline—for example, when they plan to retire
• Putting together a balanced portfolio that is based upon current market conditions and clients personal risk tolerance
An important side note: Risk tolerance is the amount of risk a person feels comfortable taking.
When an investor wants to determine their degree of tolerance, this could involve thinking about how much money could be lost without it affecting overall financial security.
That investor could also mull over financial goals and how aggressive they’d need to be to reach them on the timeline laid out, as well as emotional responses to risk.
So, which is better? Robo advising or a financial advisor? Well, it depends. There are numerous factors to consider, along with a hybrid option that doesn’t require choosing one over the other.
Automating with Robo Advising
The technology that’s behind today’s automated investing is pretty powerful, with algorithms using advanced mathematical formulas—coupled with investment planning best practices (like asset allocation and portfolio diversification)—to generate, technologically based recommendations fit for each persons risk tolerance.
Early on, these technologies were only available to people with large investment portfolios, but today, they are typically available at an affordable cost to just about anyone who wants to invest.
Automated investment generally comes with fewer fees and lower account minimums, which reduces entry barriers for new investors and makes it more affordable in general.
This type of investing can benefit newer investors in another way—and that’s because they don’t need advanced knowledge of current market conditions before investing, and they don’t need to do the heavy lifting when it comes to managing their portfolio.
People with a busy lifestyle may find that automated investing can be a good choice for them, since they can set it and forget it, perhaps only reviewing their portfolios once or twice a year.
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Managing with Financial Advisors
Just like most things in life, people perceive the investing process differently. Some of them are perfectly fine with having their portfolio managed through technology, while others want to call a live human being if they’re excited about a potential new opportunity or worried about fluctuations in market conditions.
And with a financial advisor, investors might benefit from the wisdom and experience of a professional.
This may be especially important for investors who become emotional when investing because they may benefit from a knowledgeable professional who can put investment issues into context in an objective way.
Additionally, a financial advisor can help people become better investors themselves, guiding them through the process in a way that teaches them about investments and how to make good choices.
If an investor wants or needs someone to do a deep dive into their financial situation and walk them through the pros and cons of certain kinds of investments, then a financial advisor may be the better choice.
That’s because, when going through an online platform, people with expertise in investing are creating the person’s portfolio—and investors who want granular levels of input into the individual components of their portfolio may prefer a human advisor.
Some people, meanwhile, don’t personally want to be the one literally making investments online—for example, if they aren’t comfortable using technology to make decisions when the market is volatile—and, in those scenarios, it might help to have an advisor who can do it for them.
As another consideration, some people find that they really enjoy being in the driver’s seat when it comes to investing. If that resonates, then robo advising may not be the most satisfying choice.
Millennials and Investing
Many millennials are currently playing financial catchup, at least in part because of their student loan debt. The ideal scenario for them might be to pay down their debt while also saving and investing (although that’s easier said than done) to close their wealth gap.
An early step in closing this wealth gap could be to start to invest, even if it’s only with a small amount of money per month.
And because many people in this situation only can invest a small amount monthly, at least at first, the low points of entry—meaning the low fees and initial investment amounts—associated with robo investing make this type of investing attractive to plenty of millennials.
Plus, this generation grew up surrounded by technology, so many of its members feel quite comfortable using it throughout their daily lives—and, because millennials are often on the go, having the ability to invest and monitor their investments using mobile technology can be a real plus.
This does not mean, of course, that robo advising is the most appropriate choice for all millennials. It may be that a financial advisor who takes new clients with smaller amounts of money to invest would be a better option for people in that generation who need to have that flexibility. And it’s not universally true that all millennials only have small amounts of money to invest!
Baby Boomers and Robo Advising
So, does this mean the opposite is true for baby boomers? Meaning, that they rely heavily upon human financial advisors? Well, no two baby boomers are alike and many of them do use financial advisors.
But many people from this generation appreciate the low investment fees associated with robo investment technology. The less that’s paid in fees, they figure, the more money can stay in their retirement accounts.
And, there are certainly plenty of older Americans who also feel comfortable with the ease of automated computerized services.
No matter a person’s age or generation, SoFi offers investment information that could help them make smart decisions.
Choosing the Right Strategy
Active investing at SoFi is the hands-on way to put money to work, set up in a way that makes it easy to start investing in stocks and exchange-traded funds (ETFs).
These are a type of mutual fund, a convenient and low-cost way to invest in a diversified portfolio of stocks and bonds.
When choosing the active investing option, people can learn by doing. Plus, they can connect with other SoFi members at exclusive events and experiences.
Automated investing at SoFi is hands-off investing that’s always on, and it’s easier than ever before to put money on a mission. With robo advising, investors don’t have to follow the market to master it.
Instead, SoFi will build and manage portfolios without ever charging a SoFi management fee, taking the stress out of investing and helping with the hard part: goal-setting, rebalancing, and diversifying investors’ money.
Portfolio allocations are developed based upon an investor’s age, assets, and income, and then dollars can be invested in a mix of low-cost, index-based ETFs. Market conditions are continually tracked, adjusting as needed.
Clients can always access their investment accounts, either through the SoFi app or online, with SoFi’s intuitive, convenient platform.
Benefiting from Both Strategies
When opening an invest account with SoFi, investors gain access to automated and human advisors alike.
So if someone appreciates the benefits of automated investing and chooses that option, they can still receive personalized advice from SoFi’s financial planning team.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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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.
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
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