Automated investing is a type of investing that uses computer algorithms to generate tailored financial planning or retirement advice to individuals. Automated investing platforms, also known as robo advisors, tends to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.
Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.
Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.
Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.
Investors who sign up for an automated investing platform usually take an online survey. This survey collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.
Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)
Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”
The automated investing industry is growing fast; client assets managed by automated advisors are estimated to be $2.76 trillion in 2023, up from about $19 billion in 2017, according to data from Statista.
Of course, the automated investing phenomenon is relatively new; its direct-to-investor services only began to be established in about 2009-2010, so it’s difficult to report a long-term, industry-wide track record.
Automated Investing vs Robo Advisors
Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.
In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.
• Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.
• Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.
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Why People Choose an Automated Investing Strategy
There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.
Low-Cost Process
Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more.
Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.
By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a 10,000 investment, that’s $100 a year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.
However, automated investing services have additional fees as well. Robo advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.
Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.
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More Affordable Initial Investment
Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.
In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.
Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.
As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.
Efficient & Convenient Access
With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.
Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.
Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.
Concerns About Automated Investing Services
Robo advisors do come with some downsides, however.
Limited Human Interaction
While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.
In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.
Not Fully Customizable
It’s true that a robo advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.
By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.
Risks and Costs of ETFs
Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.
ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.
What to Look for in an Automated Investment Platform
If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.
Automated Investing Fees
As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.
Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.
Affordability
Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo advisory services you’re looking for.
Investment Options
The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.
Usually, robo advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.
Investment Rebalancing
Generally, a robo advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.
For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80 percent stocks and 20 percent bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.
Human Interaction
Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.
Who Might Want to Consider Auto Investing?
Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.
That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.
As noted above, many younger investors have begun using robo advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.
The Takeaway
An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.
If you’re interested in opening an automated investing account, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of stock and bond funds for you based on your goals and risk tolerance. And SoFi doesn’t charge a management fee.
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