When you want to book an airplane ticket, chances are you check out Orbitz or a similar website, not a travel agent. Traveling down the highway? You might zip through tolls with E-ZPass instead of slowing to pay cash at every booth.
These days, money and investing are no different. Automation is making life more efficient.
You may have heard some new investment companies referred to as online financial advisors. What does that mean?
Online financial advising is a whole new game compared to the tradition of live financial advisors or do-it-yourself investing, where the judgement of one person (or a team of people) determines the outcome of your investments.
Instead, online financial advisors offer sophisticated software that individuals can use to invest in a diversified portfolio with a personalized allocation.
While there are specific differences between each of the financial companies that offer these services, together they are all part of a bigger tech movement toward automated investing—and improved expected returns (net of fees and taxes, of course) for customers.
There are excellent traditional financial advisors and planners out there who provide holistic advice for investors and encourage low-cost, passive investing. But online financial advisors are a new alternative for investors who want the assurance of an advisor for portfolio investing but the efficiency and ease of an automated system.
7 ways online financial advisors are different from traditional advisors:
1. Online advisors lower your tax bill and other costs: With algorithmic rebalancing and dividend reinvesting, shares can be allocated in the smartest way possible to keep short-term capital gains to a minimum. (Read more about how Betterment inoculates you against higher taxes.) Also, live financial advisors may have a minimum balance and higher fee structure (as much as 2% of the portfolio balance, including management fees and mutual fund expenses). Online advisors are a fraction of the cost with flat, all-inclusive fees.
2. Online advisors are never biased: Investing doesn’t operate based on human emotions like fear or indecision. Instead, programs make decisions based solely on data. That means it doesn’t freak out and sell when the data says hold, or vice versa. Eliminating bias means there’s less room for human, impulse-driven errors.
3. Online advisors are not swayed by incentives: According to a 2012 report from the National Bureau of Economic Research, most of the financial advisors surveyed who received a commission for the products they brokered, recommended strategies that maximized fees and in turn, their personal payout, rather than low-cost index-fund type portfolios. Not all financial advisors charge fees this way, but for those that do, those costs cut into your returns.
4. Online advisors are transparent and accessible: Never have to leave a message and wait for a call back for account information. View exactly what funds and the percentage you are invested in with a click of a mouse. See dividend and transaction histories in one place, and have immediate up-to-date status on account balance.
5. Online advisors save you time: Software uses your personal investing goals to create a personalized allocation for your investing goal—in just minutes.
6. Online advisors are not spending their time looking for new clients: Some financial advisors—yep, human ones—spend up to 75% of their time marketing themselves and looking for new clients.
7. Online advisors work 365 days, 24 hours of the day: Software never sleeps. Not on Thanksgiving, not during New Year’s, not in August when everyone is at the beach. Software works all day, every day to make sure your investments are performing optimally.
As a growing number of investors are discovering, it’s better to leave the tasks that require financial heavy lifting to digital systems that are more efficient—so you can enjoy the rewards.