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What is a Robo-Advisor?

Betterment automatically manages your portfolio so you don't have to worry about your investments.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: October 13, 2014

A robo-advisor like Betterment personalizes your portfolio allocation to help you reach your target—for multiple financial goals.

Betterment automatically manages your portfolio so you don't have to worry about your investments.

robo advisorsInvesting is a formula-driven science, not an art: Look at the fundamentals. Use the data to make decisions. Keep calm and carry on. It sounds like a good plan, so then why do we turn to emotional humans to manage investments?

Until a few years ago, most people didn’t have any other options. It was either do it yourself or hire another person to do it for you. However, people, as has been widely documented, have a lot of behavioral biases when it comes to money management. We believe technology is the solution.

When Betterment’s services opened in 2010, it was the start of a new era—that of automated investing, which uses algorithms and automation technology to manage investment portfolios.

The growing popularity of automated investing has prompted the press to dub Betterment and others as “robo-advisors.” We already use robo-devices in many other parts of our daily lives to optimize transactional activities. Now, why not investing? The term has been seized upon by some in the traditional financial advisor industry to make our disruptive technology sound, well, not human—but we have many humans (!) who are working on the technology to help you do better.

What is a Robo-Advisor?

It is the automation of every task that’s considered part of good portfolio management—from providing a tax-efficient diversified portfolio to advising you on allocation advice, and then following up with you on an ongoing basis to help keep your money on track to hit your goals. In addition, a robo-advisor should offer complete transparency—log in from the Web or mobile to see exactly the activity that’s happening in your account. That’s what we do at Betterment.

A robo-advisor does not wake up on the wrong side of the bed—or get fearful when the markets fall and has to convince a client to buy—it does the job it was programmed to do: Optimize investments, based on quantifiable research, to help set you on the path to maximizing your expected returns.

Follow the Money

While the nickname is hokey at best, its popularity with the press is a sign that a very real—and we believe inevitable—shift is happening in investing, vis-à-vis technology. And the money is following.

A September 2014 study published by research company MyPrivateBanking Research predicted robo-advisors as an industry are likely to grow to at least $255 billion in managed assets over the next five years—up from $14 billion in 2014.

So what does automated investing, or robo-advice, do for you that humans cannot? Here’s what:

1. Automate Tax Efficiency

Squeezes every last drop of tax efficiency out of a portfolio through better accounting, automated daily tax loss harvesting, tax-efficient funds, and tax-aware rebalancing.

At Betterment, every investor automatically receives a tax-advantaged portfolio. Betterment uses ETFs and municipal bonds as two ways to embed tax efficiency. Additional tax savings can be found with the use of strategies like tax loss harvesting, tax-efficient buying and selling, and tax-smart dividend reinvesting. Each of these strategies is executed algorithmically on an ongoing basis to save customers money.

2. Automate Trading and Transactions

Offers faster, more secure, down-to-the-penny trades at zero cost. There is never any market timing, and it’s never driven by irrational emotions.

Betterment’s proprietary trading platform allows us to perform a number of performance-enhancing moves for our customers, including fractional share trading, automatic rebalancing, and smart dividend reinvestment. There is never an additional charge for buying or selling shares.

This automated ‘plumbing system’ is one way we can improve customer behavior. Research has shown that investors can lose potential returns due to their irrational behavior (like trading too much, trying to time the market, or not rebalancing regularly); however, by automating buying and selling we can reduce the impact of that suboptimal investor behavior.

3. Automate Portfolio Management

Puts your portfolio on auto-pilot; sends reminders when things need your human touch; helps keep you on track to hit your goals; personalizes every portfolio for exactly your needs. 

Proper risk allocation is one of the most important factors in meeting your investing goals. And technology and algorithms are very good at taking your inputs (your financial goals, and the length of time you have to work toward those goals) and providing precise allocation advice—within seconds.

You can learn more about our automated advice in the white papers: Our Goals and Advice Explained and Our Stock Allocation Advice.

Don’t get us wrong, humans are essential for financial planning. We soundly believe in the power of live communication. But we also believe computers can manage investing better than humans in most cases. If you have questions about Betterment, our live customer support is here seven days a week to speak with you on the phone.

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