If you’re too busy to stay up-to-date on financial markets and investing strategies, one of the best ways to boost your returns with minimal effort is using a robo-investing platform. Whether your goal is to save for a new car soon, build a multimillion-dollar nest egg for retirement, or anything in between, I’ll review what a robo platform is and eight benefits of using one.
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8 Robo Platform Benefits Investors Should Know
Understanding eight primary benefits of robo-investing platforms can help you take the right amount of risk, cut fees, and meet your short- and long-term financial goals.
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You get SIPC protection.
Robo investing platforms offer features and technology you won’t find with traditional financial firms, and I’ll review many of them here. However, one benefit that’s the same is getting protection from the Securities Investor Protection Corporation (SIPC) for your robo accounts.
The SIPC protects customers of SIPC-member firms if the company fails and can’t repay their investments, like stocks, bonds, mutual funds, or cash. Therefore, if your robo platform goes out of business, the SIPC helps you recover up to $500,000, including up to $250,000 of lost cash.
However, the SIPC never covers losses due to market volatility or investment decline.
Also, note that it’s different from FDIC (Federal Deposit Insurance Corporation) insurance, which participating banks offer. So, don’t confuse the SIPC with FDIC insurance, which covers up to $250,000 of your deposits per banking institution per account ownership category, such as individual or joint accounts.
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2. You have a fiduciary relationship.
Another reason robo-investing platforms are just as safe as many investing companies is that they’re regulated by the Securities and Exchange Commission (SEC) as registered fiduciaries. A fiduciary is required by law to act in their customers’ best interests.
Note that many online brokerages are not fiduciaries. They operate as a transaction-based stock broker and are not required to act in your best interest.
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3. You select your account tax type.
Most robo-investing platforms offer various account types, such as high-yield savings, taxable brokerages, and tax-advantaged retirement accounts, like IRAs. I have all those accounts with Betterment, which has been my robo-advisor for decades. Another good platform to check out, especially for beginners, is Acorns.
For instance, my savings are for emergencies and planned short-term purchases. My brokerage is for medium-term goals, such as expenses I’ll have in more than about three years from now. And my IRAs are building wealth for the long term, so I have plenty of income in retirement.
Some robo platforms may also offer retirement plans for the self-employed, such as a solo 401(k) or SEP-IRA, which is the type I use. Or they may offer regular 401(k)s, which you could provide to employees if you run a small business.
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4. You choose optimized combinations of funds.
Robo-investing is an automated way to build wealth using a portfolio of funds. The platforms allow you to choose your level of risk based on an initial intake questionnaire to consider your age, savings, and goals. Then, they choose various index or exchange-traded funds (ETFs) with underlying assets that match your risk profile. But you can always increase or decrease your desired risk level as needed.
Robo platforms exist to prevent you from losing money by picking individual stocks, which can be more of a gamble than an investment for the average person. Investing in funds means buying hundreds or thousands of underlying securities, such as stocks, bonds, and real estate. In other words, you purchase the returns of the market instead of just one company, such as Google or Disney, which cuts risk.
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5. You get broad market diversification.
The optimized combinations of funds used by robo platforms represent different asset classes. They might include domestic or international equities, bonds, real estate, or an entire index, such as the S&P 500 or the Wilshire 5000. While swaths of the market can undoubtedly decline, owning funds over a long period, such as at least five years, reduces your risk.
For example, from 1973 to 2022, the US stock market returned an average of 11.7% annually. If you invested $10,000 in a total market index fund in 1973 and left it untouched, you’d have over $2.5 million today.
Assuming a more moderate average annual return of 7%, a $10,000 investment today will grow to about $76,000 if left alone for 30 years. But if you invest $10,000 annually, or about $833 a month, with a 7% return, you’ll have more than $1 million after 30 years.
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6. You pay relatively low fees.
In addition to making you a diversified investor, robo platforms aim to cut your expenses. They charge fees that are much lower than many human financial advisors. That’s because they use technology, like algorithms, to deliver their service at a lower cost and offer low-cost index funds and ETFs.
For example, an advisor charges about 1% to 2% of a portfolio value they manage annually. If the market allows you to earn 7%, and an advisor takes 2% off the top, you only make 5%. And, you still pay an advisory fee even in years when the market underperforms. The larger your portfolio, the smaller the management fee should be, but it still adds up.
Robo platforms may charge less than 0.35% annually, which is a bargain. For instance, if you have $100,000, your fee could be $350 a year or about $29 monthly.
You also pay fees for the funds in your portfolio, known as an expense ratio. They automatically get deducted from your balance, so many people mistakenly believe they don’t pay investing fees. Remember that no-fee investing doesn’t exist–you should expect to pay reasonable costs, even with a small portfolio.
However, wise investors should do everything possible to minimize fees, especially during the accumulation phase of life, where you may not need specialized advice.
I’m not saying talented advisors shouldn’t be fairly compensated for their guidance and investment management services. But you’ll likely only need ongoing financial management if you have a large portfolio or are approaching or starting retirement.
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7. You get automatic asset rebalancing.
Robo platforms routinely monitor the asset classes you own and rebalance them back to your intended proportion and risk tolerance. They sell fast-growing fund shares and buy slower-growing ones to keep the original shape of your portfolio.
For example, if the stock market rises, your portfolio could become overweight with stocks, which are inherently riskier than most other asset classes. The solution is to sell shares of stock funds and purchase other asset classes, such as funds with bonds or cash, to ensure you’re not vulnerable to more investment risk than you want.
That makes robo-investing an excellent way to stick to a plan in mathematical detail. An algorithm won’t sell shares in a panic if prices go down or buy shares rising fast out of greed. It keeps you from trying to beat the market or doing something undisciplined with your money.
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8. You get the benefit of tax-loss harvesting.
Many robo platforms offer automated services to reduce your income taxes, known as tax-loss harvesting. It’s a strategy provided by most traditional investing companies, but it can be manual, time intensive, and therefore expensive compared to robo services.
Tax-loss harvesting is when you sell some investments as a capital loss to offset capital gains or other taxable income in your portfolio. It gives a typical investor who uses it a $3,000 deduction against their ordinary income tax.
For example, if you have a 20% average tax rate, a $3,000 deduction would save you $600 annually. That’s likely more than enough to cover the annual fees a typical robo platform charges!
Tax-loss harvesting legally lowers your net taxable income if certain conditions are met and you use a taxable brokerage account. It’s not a strategy for retirement accounts because your taxes on gains are either deferred or tax-free when you make withdrawals.
Because robo platforms are software-based, they can make complicated tax-loss harvesting calculations and required trades at scale and for a low cost to customers. Your responsibility is to file the paperwork the platform sends you–Form 1099-Bopens pdf file to report capital gains and losses and 1099-DIVopens pdf file to report dividends–-with your tax return.
This article originally appeared on Quickanddirtytips.com and was syndicated by MediaFeed.org.
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