#Morningstar #RoboAdvisors #RoboAdvisorExplained

Digital investing advice comes with automated portfolios and cheaper fees, but speaking with a person may appeal to some investors.

0:00 Robo-advisor vs traditional advisor
0:12 What is a robo-advisor?
0:51 How much does a robo-advisor cost?
1:19 Robo-advisor vs traditional advisor on fees
1:48 Digital investment portfolio based on age or investment style
2:02 Robo-advisors and traditional advisors differ on financial planning options

Robo-advisors offer another way to invest if you don't want to hire a traditional financial advisor. They present their services as easier and cheaper. But are robo-advisors worth it?

These platforms offer digital investment management. They use automated technology to create semi-tailored portfolios for their investors. And these portfolios are often made up of low-cost, passively managed funds.

You can open an account for 5,000 or less. And some companies don't require a minimum investment amount. New investors or those with smaller balances might find this attractive.

Many robo-advisors ask their clients to fill out a basic questionnaire to understand their goals, retirement plans and risk tolerance. Others avoid asking questions and offer behavioral coaching via text or email to help clients stay on track.

Investment advice from a traditional advisor or robo-advisor comes with a fee, although in some cases robo-advisors roll their fees into what otherwise seems like a free product.

Digital advice is cheaper than that charged by a real advisor. Morningstar surveyed more than a dozen robo-advisors and found that the median advisory fee was 0.30% of assets per year. A traditional financial advisor typically charges 1%.

Here is an example.

An investor with a $500,000 portfolio might pay $5,000 a year to a traditional advisor. The same investor could pay 1,500 euros per year to a robo-advisor.

Another level of typical costs for digital advice involves expense ratios for portfolio funds. It all depends on whether the company charges for this. A few are free, but in those cases, robo-advisors find other ways to make money.

Robo-advisors typically steer younger clients or more aggressive investors toward portfolios heavier in stocks or other volatile assets, and they recommend portfolios heavier in bonds or less volatile assets to older or more conservative investors.

The level of personalized financial planning increases as one moves from digital to traditional advice. Robo-advisors provide basic goals and financial planning tools, such as savings and debt reduction calculators. Some companies provide access to actual advisors to discuss financial topics for an additional annual or flat fee. These advisors offer complex financial planning like traditional advisors. Their personalized services include Roth conversions, tax strategy, and estate planning. However, they are limited to interacting with customers over the phone or during video calls. In-person interaction is missing. Some investors might feel more comfortable working in person with a traditional advisor to make decisions.

The value of robo-advisors depends on the needs of the investor. They might better appeal to an investor looking for an automated portfolio, lower fees and little need to meet face-to-face with a human being.

Learn more about digital investment advice.

What is a robo-advisor? https://youtu.be/q3j70Nq_5LI
Your guide to getting started with Robo-Investing https://www.morningstar.com/specials/your-guide-to-getting-started-with-robo-investing
The best robo-advisors of 2022 https://www.morningstar.com/articles/1088193
The worst robo-advisors of 2022 https://www.morningstar.com/articles/1088952

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