What is a Robo Advisor?

Saving for your retirement at an early age is an important step toward financial freedom in your golden years, but with an alphabet soup of IRA, SEC and 401(k), many younger investors find themselves stumped.

Turning to a human financial advisor used to be the sole way of getting help with an investment portfolio — until the rise of the robot, er, robo-advisor, that is.

A Guide to Understanding Robo-Advisors

Robo-advisors are gaining in popularity because they are cheap and accessible and often have much lower minimum investment requirements than traditional brokerage services.

In this guide, we cover topics that will help you decide if this portfolio management tactic is right for you.

What Is a Robo-Advisor?

A robo-advisor is an intelligent investment software that utilizes computer algorithms to determine how to invest a client’s money. The software that powers robo-advisors is the same software that financial planners have been using for more than two decades, but in 2008, when Betterment stepped onto the scene as the first robo-advisor, access to this unique software began to transition to anyone with a computer.

“Robo-advisor” is simply a much cooler and catchier term for automated investment services. Among those automated investing services offered are investment selection, retirement planning and tax optimization (also called tax harvesting).

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How Do Robo-Advisors Work?

The short version: Robo-advisors use computerized algorithms too complex for us to understand that helps us invest our money wisely and lucratively.

The long version: Robo-advisors manage investments using the same technology that human wealth managers and financial advisors have had access to since the early 2000s. This technology utilizes passive indexing strategies, optimized with modern portfolio theory (MPT).

Each company’s algorithms will vary and are, obviously, proprietary. Some companies even offer specialty investment portfolios, like…

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