Should You Invest With Robo-Advisors?

It wasn’t that long ago when Equifax was breached, leaving many people’s financial data not secure. However, even with financial establishments facing backlash for poor security, robo-advisors are growing in popularity among many financially curious and digitally knowledgeable consumers. Is that a wise decision?

The investment market has long been considered a tool for the wealthy, barred off by costly financial planners and even pricier portfolio profiles. Robo-advisors — automated algorithmic tools designed with leading economic theories - remove or lower the bar for entry. Additionally, without a need for brick-and-mortar business faces or personal financial advisors for every client, the fees are either eliminated or only a fraction of what they are compared to in-person advisement.

Can You Trust Robo-Advisers With Your Money?

While many people might experience some apprehension investing some or all of their money with a digital interface, it is essential to realize the integration of such tools even among human advisors. Many investment firms will utilize robo-advisors to reel in consumers for other services, like estate planning. The necessity of algorithms and computerized tools is ingrained in nearly every aspect of finance, meaning it is challenging to get away from it.

What a robo-advisor does differently is removing the security of a human face. However, that does not mean the service is not secure. Many companies now use two-level security or more to help ensure the safety of your investment. In many cases, you are required to log in with a password and then retrieve a code from your cellphone or another device. Multi-level authentication does drastically reduce the odds of security breaches.

If the worse were to happen, robo-advisors, like investment firms, are insured to cover losses. The Securities Investor Protection Corporation provides up to $500,000 per account due to a broker-dealer failure, which would include a security breach.

Therefore, can you trust a robo-broker to keep your money safe? Yes, at least as much as you can trust any other legal investment firm.

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Should You Trust a Robo-Broker?

While you can trust a robo-broker to secure your money, a better question is, should you? The answer is not as cut-and-dry. Trusting a digital entity, especially a financial one, is about maintaining faith in the system's longevity. Before investing through a robo-broker, you will want to check the amount of funding it handles and its number of assets under management. For example, Personal Capital — one of the leading robo-advisors — manages over $10 billion in AUM, suggesting legitimacy and staying power.

However, to the more specific question of whether you should trust a robo-broker, it depends. It depends on what type of investor you want to be and the level of customization you want with your portfolio. Most people who use robo-advisors are considered hands-off investors who prefer to add money to their accounts and not interfere with the portfolio. If you are more hands-on, you might desire a more traditional broker-investor relationship.

Robo-advisors are valuable tools to an extent. For people looking for entry-level investment opportunities with potentially safe portfolios and low entry costs, a digital advisor could work well for you. A traditional investment path is likely best for investors who like to take risks or prefer to meddle in their portfolios. In the end, it is, like most things, up to you.

Have you or would you invest with a robo-advisor? Leave a comment explaining your reasoning and help keep the conversation going.