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Pros and cons of having a ‘robo adviser’ manage your portfolio

"Robo advisers" are computerized financial advisers that use algorithms to automate portfolio management with little or no human intervention. Photo Credit: Getty Images/iStockphoto / primeimages

So-called “robo advisers,” computerized financial advisers that use algorithms to automate portfolio management with limited or no human intervention, are projected to have $2.2 trillion in assets under management in five years, according to Maria Cardow, director of business consulting at Synechron in Manhattan.

Typically, you open an account online that is funded from your bank account or an existing investment account. You fill out a brief questionnaire about your risk tolerance, time horizon for investments, income and other information. Your money is allocated across a broadly diversified portfolio of low-cost index funds, as determined by an algorithm that analyzes your answers to the questionnaire, explains Steve Fox, founder of Next Gen Financial Planning in San Diego. Rebalancing is done automatically, and for taxable accounts, tax loss harvesting is performed regularly. Do you want a robot managing your money?

The pros

“Very easy to use, also less expensive than a human financial adviser — around 0.1 percent to 0.25 percent per year, compared to an average of 1 percent per year for humans,” Fox says.

Then too, “If they encourage people to invest who wouldn’t if they needed to talk to a traditional financial adviser, they serve a useful social purpose,” says Robert Johnson, CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania.

The cons

“They often fail when there are significant market disruptions,” says Johnson. There’s no human to keep you from doing something ill-advised in a knee-jerk reaction to the market.

A recent Capital One Investing survey found 52 percent of investors polled prefer human advice.

Another negative is zero customization. While people may share similar demographics, everyone’s situation is unique.

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