Many investors use Robo-advisors these days. Robo-advisor has become popular for its cheap prices and automated investment opportunities. However, there are still disadvantages of using Robo-advisors.
By its algorithms, you can get what you have in mind by using Robo-advisors.
Those algorithms in Robo-advisors are built and managed by financial professionals. Those things may sound interesting for you. But here are three disadvantages of using Robo-advisors that you have to consider.
1. Not one-size-fits-all solutions
Robo-advisors offers a limited range of assets. It should give enough reason for you not to keep all of your eggs in Robo-basket.
When you use Robo-advisors, you are not 100% protected from losing money, thus, you still have to diversify your investment. Yet, the diversification provided by Robo-advisors is not super powerful.
It mainly provides stocks and securities. Therefore, you need to still diversify your types of investment outside the Robo-advisors. You still need to have money in cash, real estate, and perhaps commodities.
2. Take rash action in times of turmoil without telling you
One of the Robo-advisors provider, Betterment, suspended trading during ‘Brexit’ market volatility last year. They automatically did that without telling their customers to prevent them from making impulsive decisions with their money.
You need to consider these ways of some Robo-advisors mitigate downturn. When the market falls, many Robo-advisors will automatically rebalance your portfolio and employ tax-loss harvesting.
If in these times of market distress you want to engage and give input, then a Robo might not be the right tool for you.
3. You have to know everything by yourselves
Executing what you want can only be achieved by knowing who you are as an investor. Every time you open an account in Robo, you have to answer the questionnaire.
To control what a Robo-advisor does with your money, you have to be reflective and truthful when it comes to filling out the questionnaires. It may sound counterintuitive but think of answering the questions emotionally, rather than logically.
Also read: Robo-Advisors vs. Financial Advisors
For example, if the market goes down, you might understand it’s a buying opportunity, but if the thought of the market going down gets your adrenaline pumping (and not in a good way), then that’s something you need to address.
