Robo-advisors are a relatively new kid on the investing block. They harness the power of artificial intelligence to help lower the cost of guided investing, while still helping to create an investing plan suited to your goals and personal financial plan. More and more companies are offering this option for ‘lazy’ investing, and busy physicians who are seeking alternatives to DIY investing but do not want the fees associated with hiring a financial advisor may find this an appealing in-between solution. With AI technology still rapidly evolving, you may not be sure if using a robo-advisor is right for you. Below, we cover the pros and cons of robo-advisors to help you understand and evaluate if this new technology is the right fit for you, and offer alternatives if it isn’t.
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Introduction to Robo-Advisors for Physicians
Robo-advisors (or digital advisors) are built on algorithms trained to optimize potential returns on your investments. These solutions use data analytics and modeling to track market trends. They handle day-to-day investing for you for a fee less than what many financial advisors for physicians may charge, especially those with high AUM percentage models (which we do not recommend), as it greatly erodes into your ability to build your net worth.
Getting set up with a robo-advisor is usually a quick process that involves answering a set of questions geared toward your risk tolerance, your investing goals, and your investing timeline to projected retirement. This questionnaire helps design an investing portfolio optimized for your needs. While limited, the personalization helps match your investing portfolio with your comfort level for risk and overall objectives for growth.
Once you’ve established a portfolio strategy, funds deposited into your brokerage account will be automatically invested accordingly. Most companies offering a robo-advisor option have low investment minimums, which can make this a great option for early investors just starting out. Conversely, as we explore in our guide to types of investments commonly used by physicians, some mutual funds have minimums into the thousands of dollars depending on the expense ratios and associated fees. Some financial advisors can have minimum account requirements up to a million dollars for assets under management, which is far from a feasible option for new attendings.
Robo-advisors generally follow a diversification strategy so that all your investing “eggs” aren’t in one basket, which helps spread and manage risk in the stock market. Unlike the “set it and forget” mentality of a three-fund portfolio or index fund strategy, robo-advisors actively track your portfolio, allowing you to be a “lazy” investor while they work behind the scenes. They often reassess and reallocate the assets within your account based on their analysis of market trends and your set portfolio strategy.
Pros and Cons of Robo-Advisors for Physicians
There’s no one perfect method of investing. Each comes with its own sets of pros and cons.
Pros of Robo-Advisors
Add a layer of security between you and emotional investing. In a volatile stock market, a robo-advisor won’t panic and sell sell sell (remember, you only lose money if you claim the losses).
Average fees are around 0.25% of assets per year, which is less than many financial advisors who charge an assets under management (AUM) fee and which may be less than a flat amount charged by advisors in a flat fee, fee only model depending on how big the portfolio is
Low opening account minimums, providing an entry point for early investors
Continually analyze market and economic trends to aim to create the highest returns for the smallest risk
Allow for asset allocation and diversification and rebalances without effort required on the part of the investor
Can have features like automatic tax-loss harvesting to minimize capital gains tax burdens
Provide unbiased investment advice without conflict of interest
Cons of Robo-Advisors
Employ standardized strategies off their questionnaire, offering limited customization
Cannot take a holistic view of your financial planning to help integrate your estate planning, tax strategy, etc.
No human point of contact or limited human interaction if you have specific questions
Don’t offer all investment asset types
If market volatility causes you to want to stockpile cash instead of investing, a robo-advisor won’t walk you through the pros/cons
Charge monthly fees or a percentage of your investments, which over time compounds lost growth potential
There’s no long track record of proven success
Which Physicians Are Robo-Advisors Good For?
Robo-advisors are a new, unique hands-off approach to investing. They are designed to handle every step of the process from portfolio management and asset allocation to rebalancing and tax-loss harvesting. These features make them ideal for busy physicians looking for “lazy” investing opportunities who want to have more active management of their portfolio than they are willing to do themselves, but at fees lower than a financial advisor..
Robo-advisors can also be a great introductory option into wealth building and investing, especially for residents and attendings early in their career. While a robo-advisor won’t educate you in investing (see our resources below to help with that!), it will help manage your portfolio until you want to try a more hands-on approach or can afford a comprehensive financial plan and/or asset management by a financial advisor.
As a note, robo-advisors don’t handle employer-provided retirement plans, such as 401ks or an HSA, which we are big fans of. Once you build significant assets outside of your robo-advisor account, it won’t be able to allocate and properly rebalance for you anymore as it doesn’t take into consideration outside investments. At this point, you may want to look into other alternatives.
Alternatives to Robo-Advisors
As we alluded to above, robo-advisors have pros and cons and are not the best fit for everyone. If you’re looking for an alternative option, we offer additional resources on the following alternatives:
Similarly, if you are looking for financial planning and not just investment management, our financial advisors for physicians can help you create a roadmap for your money.
Where to Find a Robo-Advisor
We have partnered with Wealthfront to provide robo-advisory services for our members. Learn more and set up your robo-advisor account today. They have a quick and easy setup process. You can start investing in just a few minutes.
If you already have a brokerage account set up with a company like Vanguard, Schwab, or Fidelity, they also offer robo-advisors. Check the account management fees associated with adding this service, as well as how good their reputation is for factoring in tax strategy such as tax loss harvesting. Some companies waive fees for certain account balances.
Conclusion
Robo-advisors provide a new middle ground option between a completely DIY option and utilizing the services of a financial advisor, offering more customizability and regular monitoring of your investment without the fees of a human advisor. They automatically rebalance your portfolio and apply techniques such as tax loss harvesting, without you needing to think about these things yourself the way you might if you utilized a three fund portfolio. Of course, there is a cost associated with this convenience, which can erode your wealth building over time, but low management fees on compounding growth are better than not investing at all if DIY is not for you, but your financial needs are basic enough that you don’t need a financial advisor.
If you want to dig deeper and understand what you’re investing in as your portfolio grows, learn more with: