RoboCop saved lives...Robo-Advisors save you money

Online financial advisers, or "robo-advisors," give self-directed investors a way to take more control over their portfolio. Alternative investment companies such as Betterment, Wealthfront and Motif can provide investors with a cost-efficient, hands-on method of trading and managing their funds, but many investors wonder if robo-advisors can actually take the place of a flesh-and-blood financial advisor. Remarkably, in many cases, the answer is "yes."

Benefits

Robo-advisors offer some compelling benefits over traditional financial advising models, the most apparent of which are low investment minimums and modest fees. Many firms have minimums as low as $5 to $10, while others don't have any minimum investment requirements at all, decreasing the barrier to entry. Online investment advising platforms also usually only charge from 0.25 to 0.75 percent in management fees, compared to one percent or more with traditional advisors. There is even a trend toward free robo-advising services, with companies such as WiseBanyan pioneering this innovative approach. The costs of making trades and other account adjustments are often more transparent as well, with clearly defined, straightforward fee schedules. All of these aspects work together to maximize investors' ROI. In addition, customers gain access to many of the same investment analysis and planning tools that are used by professional financial advisors, which makes it possible for these customers to make knowledgeable financial decisions on a DIY basis. Some robo-advisor firms even offer educational materials, such as webinars, emails and other resources, to help their customers stay informed. The automated approach to financial advising is also more convenient and less time consuming than having to schedule face-to-face or over-the-phone meetings with a professional investment manager. The customer-centric nature of robo-advisors also leads to a more user-friendly interface than traditional financial advisor dashboards, making it easier for investors to take control of their portfolios.

Are They Safe?

No investment is guaranteed, and they all carry some measure of risk and volatility. Even the best performing investments are subject to the ebb and flow of the financial markets, and these effects can be unpredictable. However, robo-advisory firms have a few safeguards in place to hedge against those risks. First and foremost, robo-advisory firms are required to file as Registered Investment Advisors with the Securities and Exchange Commission. This means they are legally and professionally bound to certain fiduciary duties and other legal requirements, including specific disclosures regarding fee structures, trading and brokerage processes, and conflicts of interest. In addition, most of these platforms are backed by the Securities Investor Protection Corp, insuring up to $250,000 in assets. These protections make automated advisory companies just as safe as traditional financial advisors on the consumer-protection front. In addition, these platforms use elaborate algorithms to develop automated recommendations based on responses to a questionnaire that measures an investor's return objectives and tolerance for risk. The platform then recommends a mix of investments that are diversified across a number of asset classes that include:

•          Equities, from volatile emerging market stocks to shares of established, reliable companies
•          U.S. and international government bonds
•          Real estate investment trusts

This diversification provides some protection against risk and loss, as investments are spread over a variety of sectors. Online advising platforms also allow for a more systematic approach to the development and maintenance of a portfolio. Investors are not only able to establish more concrete objectives, but better adhere to the plans that they create. This encourages investors to ride out periodic market fluctuations and reduces the return-jeopardizing urge to buy and sell unnecessarily during financial storms. However, robo-advisors also offer enough flexibility that you can easily change your asset allocation if need be.

How Are They Competing?

The robo-advisor approach is increasing in popularity, and this trend is projected to continue into the foreseeable future. Much of this ability to successfully compete with the long-standing big names in financial and investment management is the similarity between robo-advisors and traditional advisors. The very basis of the robo-advising is to provide a reliable selection of exchange-traded funds that investors can basically place on autopilot, establishing a passive revenue stream. This strategy is similar to the turnkey asset management and wrap account programs offered by conventional advisors. However, in many cases, the simplicity, cost-effectiveness and hands-on ability offered by automated online financial advising trumps the services offered by traditional investment advisory firms such as John Hancock and Vanguard, especially for tech-savvy Gen Xers and Millennials. This growing demand for do-it-yourself advising services have not gone unnoticed by traditional advisory companies. In response to the encroachment on their market share, some long-standing firms have launched their own versions of online advising, as with Charles Schwab's Intelligent Portfolios service. In other cases, financial management companies have formed alliances with robo-advisory platforms, such as the partnerships Fidelity Investments formed with Betterment and Learnvest. As the robo-advising method of financial management continues to expand, investors can expect to see additional offerings from conventional advisors and newly established automated advising platforms alike. While investors may be wary of this newcomer on the playing field, the advantages offered by robo-advising services have them poised to become staples of financial management. As with all financial matters, due diligence and careful consideration are key. However, those who choose to go the self-directed route may just find that financial advisors aren't the only effective way to invest.