By Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy
What do online shoppers and investors who use robo-advisers have in common? Both provide convenience and oftentimes lower costs. But before you decide whether using a robo-adviser is the best way to invest, check out the SEC’s Investor Bulletin on Robo-Advisers.
“Robo-adviser” generally refers to a digital investment advisory program that uses automation to create and manage an investment portfolio. Like other online services, robo-advisers have become more and more popular over the years. Although a robo-adviser may offer some of the same products and services as a traditional investment adviser, there are also some differences.
A few important things to remember when considering using a robo-adviser include: understanding the level of human interaction available; keeping your key information updated; and knowing the fees and costs involved.
Make sure you are comfortable with the level of human interaction that will be available to you, as it varies from one robo-adviser to another. Some may offer an opportunity to work with an investment professional to discuss your investment needs while others may only offer technical support, which could limit you to relying on their website or other sources for investment information. Others may offer a combination of both automated and personal advice. Only you know what type of personal interaction makes you most comfortable.
Similar to a traditional investment adviser, a robo-adviser collects information about your overall financial goals, risk tolerance, investment timeline, income and other assets. The difference is that rather than talking to someone in person, a robo-adviser asks you to complete an online questionnaire. Filling out the paperwork online may be more convenient for you and can save you time, but remember that the investment portfolio the robo-adviser creates and manages for you is limited by the information it requests and receives from you. It’s important to keep your key information updated because your portfolio is based on the most current data you provide.
Costs and fees are a big consideration whenever you invest. Robo-advisers often offer investment advice for lower fees and costs and sometimes even require lower account minimums than traditional advisers. That may be attractive if you’re just starting out in the investing world and don’t have a large amount of money to invest. However, it’s important to remember that total overall costs may include not just the cost of advice but also costs and fees associated with the investment products the robo-adviser utilizes.
Investment products offered by robo-advisers vary. Many offer pre-determined portfolios that you may or may not be able to customize. Others may use exchange traded funds (ETFs), which may be more suitable for some investors than others. Their approaches to investing also may vary widely. Make sure the robo-adviser you choose meets your financial needs and goals and that you understand the costs, benefits and risks of your investment decisions. And always check to see if your robo-adviser is registered by using the free search tool on Investor.gov.
Just as you would go online and shop for the best products and deals for life’s everyday essentials, it’s important to shop around, do research and prepare for perhaps the most important life essential–a financially secure future.
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.