From smart phones to smart homes, technology is continually redefining the way we live. Even with finances, automated investing with a robo advisor has changed the way some investors manage their portfolios.
What's a robo advisor?
A robo advisor is an investment account that typically uses a combination of software, algorithms and human input to create and manage investment portfolios. Think of it as an automated way to invest, often at a lower cost than traditional human advisors, since there's less hands-on support required. After you input your goals, risk tolerance and timeline, a robo advisor does the primary work of creating and managing your portfolio. That gives you the freedom to check on your investments at your leisure.
A robo advisor is an investment account that typically uses a combination of software, algorithms and human input to create and manage investment portfolios.
How do robo advisors work?
Getting started with a robo advisor through an Ally Invest Robo Portfolio is straightforward:
Share your financial profile: You'll complete a quick survey about your investment goals, time horizon and how much risk you're comfortable taking. With Ally Invest, you can choose between a core, income, tax-optimized or socially responsible portfolio.
An algorithm customizes your portfolio: Based on your input, the platform recommends a diversified portfolio. These portfolios often consist of exchange-traded funds (ETFs). Why ETFs? Because they, like stocks, trade on a market. But unlike individual stocks, they offer more exposure to the market.
Set up automatic contributions: You can often link a bank account to set up regular, automatic transfers, making it easy to consistently add to your portfolio.
Automation does its work: Once set up, the robo advisor handles ongoing management, including automatic rebalancing to keep your portfolio aligned with your target allocation and risk tolerance. Some even offer tax optimization strategies. Continue to regularly monitor the account and make any updates needed if your goals, timeline or risk tolerance change.
The benefits of using a robo advisor
Robo advisors offer several benefits that help make investing more accessible and efficient:
Cost-effective: Generally, robo advisors have lower fees compared to traditional human financial advisors, which can save you money over time
Accessibility: Robo advisors prioritize being user-friendly, making them an easier entry point for beginners and a simple addition for the more experienced or hands-on investor
Diversification: Robo advisors typically create diversified portfolios across various asset classes (such as ETFs and mutual funds). This helps mitigate risk
Potential drawbacks of robo advisors
In addition to the benefits, it’s also important to understand the potential downsides of robo advisors:
Lack of personal interaction: If you prefer in-depth discussions about your specific financial situation or need complex advice, a purely digital platform might feel less personal. However, many robust robo advisors, such as Ally Invest Robo Portfolios, do employ human financial professionals who oversee recommendations and can provide some support
Customization constraints: Robo advisors typically offer pre-set investment strategies based on your profile. While diversified, robo portfolios might not suit every investor's unique needs or niche strategies
Market risks: Like all investments, those managed by robo advisors are subject to market fluctuations and the risk of loss. There's no guarantee of returns
Read more: Robo advisors vs. financial advisors
Are robo advisors safe?
Reputable firms, such as Ally Invest prioritize the safety and security of your investments and personal information. They typically come with security, encryption and fraud alert features. When choosing a platform, verify the specific safeguards in place.
Beyond digital security, robo advisors contribute to investment safety through features like portfolio rebalancing. This helps keep your portfolio aligned with your initial risk tolerance and diversification strategy. While robo advisors help manage your portfolio, it's still wise to monitor your investments regularly — don't completely "set it and forget it."
Choosing the right robo advisor for you
Deciding if a robo advisor is the right fit involves considering your personal preferences and financial circumstances. If you're new to investing and want a simple, cost-effective way to build a diversified portfolio, a robo advisor can be a valuable tool. On the other hand, if you prefer more hands-on control or highly customized strategies, you might prefer an Ally Invest Self-Directed Trading account.
Read more: Which type of investment account is right for you?
Here are some factors and questions to ask yourself:
Factors to consider
Costs: Compare fees and minimums across different platforms. Are they a percentage of assets under management, or flat fees? Ally Invest's Robo Portfolio only requires a $100 minimum to start. We also offer a cash-enhanced account with no advisory fee or a market-focused account with a 0.30% annual advisory fee.
Investment types: What types of portfolios are offered? Do any of them align with your priorities? With an Ally Invest Robo Portfolio, you can select a core, income, tax-optimized or socially responsible portfolio.
User experience: Is the platform intuitive and easy to navigate? Is customer support readily available when you need it?
Personal circumstances: Do you have a complex financial circumstance (e.g., estate planning or tax strategies) you'd prefer to discuss with a human advisor?
Ultimately, a robo advisor is a powerful tool that makes investing more accessible and manageable to a wider range of people. By learning how they work, you can decide if a robo advisor is the right choice for you.
