Robo-adviser

The term  generally refers to an automated digital investment advisory program. In most cases, the robo-adviser collects information regarding your financial goals, investment horizon, income and other assets, and risk tolerance by asking you to complete an online questionnaire. Based on that information, it creates and manages an investment portfolio for you. Robo-advisers often seek to offer investment advice for lower costs and fees than traditional advisory programs, and in some cases require lower account minimums than traditional investment advisers. The services provided, approaches to investing, and features of robo-advisers vary widely.

Level of interaction with a person
The amount of human interaction available to you may vary from one robo-adviser to another. Some robo-advisers may offer the opportunity to contact an investment professional to discuss your investment needs (this hybrid of both automated and personal advice is sometimes referred to as “bionic” advice). Other robo-advisers may only make technical support staff available, which will limit you to relying on the information on their websites or other sources you find to address your questions about investing.

As with any adviser, it is very important you take the time to learn about the robo-adviser’s services, including the level of interaction with a person, and find out answers to any questions you may have. Here are a few questions to consider:


 * How much human interaction is important to you? Would you like to be able to ask a person questions about your investments, the investment strategy being used, and potential risks? Would you like to be able to speak with a person during market events, such as periods of exceptional volatility or downturns?  Do you prefer being able to talk in person or on a phone, or is electronic communication fine with you?
 * What is your level of financial literacy, especially when it comes to investing? Your ability to ask a person questions about investing (for example, about the robo-adviser’s investment strategy) may be limited and you may need to rely almost entirely on the robo-adviser’s online disclosures or other sources of information that you find on your own.  Are you comfortable using online resources?
 * As with a traditional adviser, you may be interested in how often you will have contact with the robo-adviser. For example, how often does the robo-adviser follow-up with clients to confirm any changes that would affect their investment choices?  Would you have to contact the robo-adviser with any updates to your financial situation?

Creating a recommendation
A robo-adviser uses information you provide to create a recommendation. As a result, a robo-adviser’s recommendation is limited by the information it requests and receives from you, typically through an online questionnaire. It is important to keep in mind that some robo-advisers may obtain and consider only limited information about you. In addition, as with traditional advisers, in many cases the burden to update this information will fall on you. Here are a few questions to consider:


 * Would you use the robo-adviser for a specific financial goal (for example, retirement, buying a home, or investing for your children’s education), or to meet your overall financial needs more broadly? Does the robo-adviser’s recommendation take into account your purpose in using the robo-adviser?
 * Does the robo-adviser’s recommendation take into account relevant personal financial information, given your goal? For example, does the robo-adviser ask for information about high interest credit card debt or student loans you may have? Does it take into account your bank and savings accounts? Does it take into account your real estate holdings, such as your home, or other investments such as retirement accounts? Does it take into account other assets that you have?
 * How does the robo-adviser take into account your tolerance for risk? How you respond to the robo-adviser’s questions about risk can affect what portfolio the robo-adviser recommends. In addition to the initial makeup of your portfolio, how does your risk tolerance impact how the robo-adviser might rebalance your portfolio (for example, in the event of a market decline)?

Approach to investing
Different robo-advisers have different approaches to investing, including different investment styles and different products offered. Some have several pre-determined portfolios of investments that they will recommend for you that you may or may not be able to customize. Some robo-advisers focus solely on a limited range of investment products, such as broad-based exchange-traded funds, or ETFs.

You should take the time to understand how the robo-adviser develops a portfolio recommendation, and what pieces of information it uses – or does not use – in developing the portfolio. Here are a few questions to consider:


 * Does the robo-adviser offer a limited range of investment products, such as only ETFs? Are the investment products utilized by the robo-adviser appropriate for your goals?
 * Does the robo-adviser only offer certain limited portfolios within those investment products? How many different portfolios could your money possibly be invested in?  What portfolio does the robo-adviser recommend for you and why?
 * What type of accounts does the robo-adviser manage? For example, does the robo-adviser manage individual retirement accounts (IRAs)? Taxable accounts? 401(k) accounts or college savings plans?

Tax loss harvesting: Does the robo-adviser utilize tax loss harvesting? Tax loss harvesting involves selling investments that have experienced losses in your account, which may result in tax implications. The value of tax loss harvesting can depend on your particular tax situation in a given year. It also may implicate rules against wash sales. Make sure you understand the tax implications of any sales, and consider whether you may wish to consult a tax adviser.

Fees and other costs
Fees and other costs can greatly impact your return on investment. One of the main benefits of a robo-adviser can be lower fees and costs – so it is very important that you understand what you would be charged. A robo-adviser may offer lower-cost investment advice, but if the robo-adviser utilizes investment products with high costs, your total overall costs could still be high. It’s important to understand your total costs.

Licensing and registration
Firms that provide advisory services in the U.S. are typically registered as investment advisers with either the SEC or one or more state securities authorities. Although the services that they provide are automated, robo-advisers in the U.S. must comply with the securities laws applicable to SEC or state-registered investment advisers. Use the SEC’s IAPD Investment Adviser Public Disclosure (IAPD) database, which is available on Investor.gov, to research the background, including registration or license status and disciplinary history, of any individual or firm recommending an investment.

Like traditional investment advisers, robo-advisers are also required to file a Form ADV. Robo-advisers may also offer certain information about their advisory business on their websites or in communications with clients. Check the robo-adviser’s website regularly to see if there is any updated information.