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If you aspire to be successful in investing, but clueless on when and where to start your path, the lack of knowledge may cause confusion and make investing seem complicated and intimidating. Fortunately, there are a bunch of options you can seek to make things easier. Where one does not need a background in finance and which does not require a large amount to put your investables in the stock market. A popular example would be robo-advisory services.
Automated or digital investing platform or more commonly known as a Robo Advisor, is an investment advisory service that can be acquired online. To put it simply, it’s an online portfolio management service, where your basket of goods are managed by artificial intelligence. Revolutionary, isn’t it?
One of the companies that offer this service to potential and experienced investors is Fidelity. Fidelity’s robo advisor is called Fidelity Go.
Robo advisor or Fidelity Go in particular, claims to benefit their clients through setting achievable goals while taking a more passive approach with lesser management fees, or none at all. Distinctly, for investments below $10,000.
What Is a Robo Advisor?
Robo Advisor is an automated investing program powered by machine learning technology. It calculates ideal financial decisions for their clients based on the information that it was provided. Basically, the digital counterpart of an investment advisor that would otherwise be a real person.
Generally, a Robo advisor’s purpose is to build and manage portfolios. Which can render you with little to no effort at all.
How Do Robo Advisors Work?
Not all Robo Advisors function in the exact same way, nor do they offer the same features. However, most of them are still identical in a way. Here’s a gist of how they basically work.
As previously mentioned, it is a system that utilizes machine learning technology or artificial intelligence. This means that they feed the system with data gathered by asking the investors specific and general questions about their personal preferences and their financial objectives. Questions usually include one’s risk tolerance (aggressive or conservative), total investment amount, preferred profit amount, preferred turnaround time for profit, and more.
From there, the algorithm processes the data and provides clients with market predictions and data based conclusions with reasonable accuracy. The result will likely consist of suggestions regarding portfolio allocation. The portfolio allocation will indicate the specific commodities you should invest in, like funds, stocks, bonds, or a combination of such.
Moreover, clients are also presented with investment strategies that boost their chances of achieving their desired goal, within their desired timeframe. The more information you feed the system, the more accurate and evident its conclusion.
Once an investor agrees and opens a Robo advisor account, the Robo advisor will then integrate actions that it deems necessary to properly build and maintain the portfolio. Of which, the clients will be notified and updated online on a regular basis.
What’s a Hybrid Robo Advisor?
A hybrid Robo advisor is an upgraded investing solution that involves both the technological and human aspects of an investment advisory program.
Fundamentally, it leverages the benefits of a Robo advisor with active investment strategies instead of a more passive approach. With no guaranteed performance and minimal options to educate Robo-advisors on the art of trading, or the contemporary market issues that affect investment options, the unguaranteed effectiveness of Robo-advisors are offset by human integration. Basically, the elements of a Robo-advisor with a breathing financial advisor steering the wheel.
Based on economic and market conditions, risks differ over certain periods of time. A hybrid Robo advisor system is designed to overcome these risks and execute investment strategies according to market fluctuations. In essence, it creates a more responsive portfolio that makes the most out of emerging trends in the whole investment landscape. Fidelity Go is a prime example of a hybrid Robo advisor.
Can Robo Advisors Help Manage Some of the Risks in Investing?
Essentially, yes. As previously mentioned, market fluctuations are inevitable. The great thing about the inclusion of machine learning technology in Robo-advisory is that it provides an efficient market hypothesis, generating a blend of appropriate investments that are calculated to manage and surpass risks.
How Can Robo Advisor Help You?
It is wiser to evaluate both sides of the coin in order to assure and accrue financial investment counseling of a higher caliber, we listed below the key pointers of things you need to know how Robo Advisor can help you.
Where Robo-Advisor Shines:
1. Easy Account Setup
Most Robo-advisory sites provide a brief tutorial on how to sign up, including a tutorial on how their robot advisor service works. In Fidelity Go specifically, you can check the video on their sign up page.
Upon signing up, you will be presented with a questionnaire that will assess the accurate investments for you, based on the data you input.
The questionnaire will include your financial objectives. How much is your start up capital, when and how much are you expecting for the return, how aggressive or conservative you are in terms of risk tolerance, and other information that directly affects your financial objectives.
Once you have answered, they will provide you with the most ideal game plan for your investables. This includes strategies, a calculation of the potential value of your investments over time, and an estimation of possible additional costs.
After that, setting up an account is just as easy as signing up on any website. You will be asked to input your name and other personal information. You will then be redirected to a funding page where you will connect your bank account so you can transfer the funds.
Moreover, this procedure proves to be time and cost efficient for the reason that in order to do this in a regular setting, you will have to set an appointment or endure a long phone call with your financial advisor regarding your information. This kind of accessibility is what sets this system apart from the traditional investing programs.
2. Goal Setting
Every investor’s goal is to gain more than what they have invested, whether it be in a limited or lengthy time frame. It is common knowledge in the market that obtaining a diverse portfolio is more likely to secure a more abundant and positive outcome for your financial assets. Robo advisor does exactly that.
With a Robo advisor, you are primarily granted with instant diversification. This is because Robo advisors tend to invest in Index Funds and exchange-traded funds (ETFs) to maintain a diverse portfolio. For example, it is likely that your Robo advisor will recommend investing in the S & P 500 index. S & P 500 includes the top 500 companies in the market.
The logic of this is that, as opposed to selecting just one, S&P 500 will provide you more security because you are always betting your money on the best performing companies. Additionally, since you are not necessarily investing in a fixed set of companies, just on the top 500 on the list, this allows your portfolio to gain more market exposure.
3. Customer Service
The main difference between a robo advisor and the traditional investment program is automation as opposed to personal attention. Generally speaking, this approach is more feasible to investors that favor an expedited process with minimal costs. Switching to digital offsets the various administrative and management fees.
In particular, Fidelity Go follows a tiered pricing system. They only collect 0.3% of your account balance. This means that for every $10,000 you invest, only $3 will be deducted on your balance. If you reach or exceed an investment initial capital of $50,000, the new percentage is priced at only 0.35%.
Additionally, they don’t require clients to pay advisory, trading, transaction, and rebalancing fees. Perfect for those who are interested in investing without much experience and capital.
Robo advisors like Fidelity Go are fairly easy to use. Fidelity itself actually provides it’s clients a mobile app they can use to further improve accessibility to their assets. Through their digital platforms, investors are regularly updated on a monthly or weekly basis. The report usually contains a summary of their weekly investment reports, investment strategy, and investment results. Through desktops or mobile apps, you can access these information in just a few clicks.
Another key feature is the ability to tap into your index funds and ETFs without exerting too much effort, you just have to input the funds on a monthly and weekly basis.
Globally, the robo-advisor industry is projected to double its AUM to $2 trillion in the next 3 years with an even better projected user growth of 21 million by 2022.
Where Robo-Advisor Fall Short:
1. Account Services
As initially stated, each robo advisor differs in the features they offer. Some of them are better than the other in different aspects.
A downside of Fidelity Go is that it lacks retirement arrangements under their goal attainments. This is an issue to investors who are seeking to invest for their retirement plans. Nevertheless, Betterment and Wealthfront are counterparts that offer this feature.
Another drawback of Fidelity Go is that they don’t allow transferring current assets to Fidelity and other firms. The only way to open a new account in Fidelity Go is with cash.
2. Portfolio Construction
Another negative aspect of Robo advisor is the limited customization of your portfolio. Previously, it was mentioned that Robo advisors primarily endorse index funds and ETFs. For this reason, if you are interested in acquiring stocks concerning precious metals or real estate, you are not necessarily allowed to do this, they simply don’t provide the option to.
Robo advisors are not necessarily great for everyone because it depends according to your specific needs. If you have a significant amount of wealth and a large number of assets, this may not be for you. This option may be more fitting for investors with minimal assets.
3. Portfolio Management
The main point of investing is to increase your initial financial assets so you can use it for future financial needs. With this in mind, you should ask yourself if you are really comfortable in granting Robo advisors access to your assets and take over your portfolio. After all, it’s your hard-earned money.
Robo advisors lack the ability to assemble a specifically tailored account. This is a key feature some investors seek and may not like the idea of its unavailability.
4. No Tax-Loss Harvesting
Tax-Loss Harvesting, also known as tax selling, is a method of reducing taxes while conserving the predicted risk and return profile of a certain portfolio. How it works is that it collects former undetected investment losses to offset taxes on other profits and income on your portfolio. Additionally, investors have the option to invest these tax savings back into their portfolios to yield significant growth.
However, this is quite challenging to achieve with Fidelity Go. They don’t normally set a band range to prompt a rebalancing. Because of the undetermined balancing, your Robo advisor account might face an unexpected tax deduction at an unanticipated time.
How Do I Know If a Robo Advisor or Hybrid Robo Advisor Is Right for Me?
There is no definite answer to this. In order to reap optimal results from Robo-advisors like Fidelity Go, it is important for investors to weigh the advantages and disadvantages, along with their specific preferences and financial objectives. This will help determine the most suitable integration of this technology in your investment ventures.
Robo and Hybrid Advisors like Fidelity Go are still recognized as legitimate methods. However, one should keep in mind that the effectiveness of Robo-advisors is neither consistent nor guaranteed. Invest smart and research to avoid unfortunate outcomes.
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