Robo advisors are an inexpensive solution to automate passive investments. However, the costs can compound when you factor in the additional annual management fees of specific investments, say, an index fund. If your investment goals are met by investing in index funds on a recurring basis, you might have a potential to save on the robo advisor fees. In this article, I will discuss 10 alternatives to robo advisor investing that may prove to be a better fit for your individual investment goals.
Listed below are 10 alternatives to robo advisors that you must consider:
- Index funds
- Exchange-traded funds
- Mutual funds
- Real estate investment trust
- Dividend stocks
- Growth stocks
- Bonds & money market
- Registered independent financial advisor
- Investment management software
- Self-managed active or passive investment
Passive investors seeking a completely hands-off approach should not rule out robo advisors. The best robo advisors provide valuable resources and can be instrumental in contributing towards your financial goals. However, different people have different investment goals, and what suits one investor group, might not be ideal for another. In this guide, I will discuss viable alternatives for those very objectives.
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Table of Contents
10 Alternatives To Robo Advisors That You Must Consider
Described below are ten alternatives to robo advisors that may be better suited for your investment goals.
1. Index Funds
Index funds have expense ratios. You have to bear this cost, irrespective of how you invest in the index fund. Thus, you will pay this annual fee to the company managing the index fund and the charges of your chosen robo advisor.
Some robo advisors are offshoots of leading investment management companies. These firms may restrict your choice of index funds to what they own or have to offer. You cannot choose an index fund or any other investment that is not within the ambit of the particular robo advisor.
Investing in an index fund through an asset management firm eliminates the robo advisor fees. You will still pay the expense ratio, but you have the liberty to choose different index funds. Of course, you will need to spare some time and effort to select the passive investment option.
2. Exchange-Traded Funds
An exchange-traded fund is a steady and reasonably rewarding investment opportunity. ETFs are a passive investment, except for the times when you choose to buy or sell. ETFs generally have a lower expense ratio compared to index funds.
Similar to the advantage of investing in an index fund without a robo advisor, you will not pay any annual management fee other than the ETF’s expense ratio. There may be a charge at the time you choose to sell.
Another significant benefit of choosing exchange-traded funds without a robo advisor is the freedom to invest in various options. ETFs can deal in indexes, equities, bonds and fixed income schemes, commodities, currencies, and specialty funds.
3. Mutual Funds
Robo advisors usually restrict the investment options to ETFs and index funds. Actively managed mutual funds are not a part of passive investment portfolios that robo advisors typically create and manage.
Actively managed mutual funds may offer better returns than passive investment programs. However, the risks are higher, too. On the flip side, actively managed mutual funds have substantial service fees, so consider that when weighing the pros and cons.
Robo advisors enable passive investors to leverage fractional shares of equities or stocks in an index fund portfolio. However, this choice is subject to restrictions.
What’s already in the portfolio and the equities selected by the robo advisor or its parent asset management company limits your portfolio’s diversity.
As a passive investor, you cannot choose to add any particular stock, whether fractional or otherwise. Furthermore, you cannot choose any actively managed mutual funds.
Even the passively managed mutual funds, such as ETFs, are only those the robo advisor has in its purview, preselected for it by the service developer or operator.
4. Real Estate Investment Trust
Robo advisors usually don’t deal in real estate investment trusts. Hence, you won’t have a truly diversified investment portfolio even though that is one of the primary objectives of using financial advisors and asset management firms.
Real estate investment trusts are rewarding financially. Those looking for a regular income or return generated by their passive investment should consider this option, at least as a part of their short-term strategy.
Long-term strategies require a different approach, especially in the case of real estate investment trusts because the capital appreciation is nominal. Also, you must check the financial implications of short-term capital gains through REITs applicable to your tax bracket.
5. Dividend Stocks
Since you cannot choose individual stocks through a robo advisor, the only other option is to do so yourself or through a service that enables you to have your pick. Dividend stocks may be a fitting option if you intend to hold and sustain the investment for the medium to long term.
Dividend stocks generate an annual yield, albeit not too generous in most cases. Consider the tax implications of such an income. Dividend kings and aristocrats are widely regarded as safe investment options. These companies have a long history of faring well and paying dividends.
Another significant advantage of dividend stocks is the potential capital appreciation. Some of these large companies, also known as blue-chip stocks, may record sustained growth in due course.
Thus, a significant market cap increase, diversification across industries or products & services, and share price appreciation can increase the long-term net return on your initial capital investment.
6. Growth Stocks
Dividend stocks are better for passive investors with a limited risk appetite. Those seeking higher returns and comfortable with greater risks can consider growth stocks.
Almost all robo advisors prioritize risk mitigation over returns. Thus, you are unlikely to have growth stocks in your portfolio through a robo advisor.
Exercise diligence when you research growth stocks. It is possible to manage the risks by limiting exposure and being reasonable with the investment amount subject to your financial strength.
Growth stocks are an equivalent of a jackpot when they clock double and triple-digit value appreciation. Check out the stock history of Tesla, and you can calculate how much an investor would have earned in a brief period.
7. Bonds & Money Market
Some robo advisors may include bonds in the portfolios they select and manage for passive investors. A few robo advisors are required per policy to invest a part of your capital in cash deposits. Beyond these, you are unlikely to get an opportunity to tap into the money market.
Money market instruments, such as treasury bonds or short-term loans, assuring a fixed return can be an asset in your investment portfolio. All actively managed funds and financial advisors tap into the money market, including various bonds.
Short-term fixed returns have a capital gains tax, so you must consider the implications for your immediate financial management goals. If you want a genuinely diverse portfolio, it must include at least a few money market investments.
8. Registered Independent Financial Advisor
Passive investors consider robo advisors because they don’t have the required time or sufficient know-how about the market to create and manage their portfolios.
Thus, most active investments are not readily an option. However, you can consider a registered independent financial advisor.
Independent financial advisors manage portfolios and funds actively. As the investor, you can remain passive and enable the expert to manage your investment while adhering to your preset parameters.
9. Investment Management Software
Investment management software has been an integral part of the global fin-tech industry for decades. It is only recently that consumers have got access to such solutions, including robo advisors.
You can use those or similar investment management software that financial advisors and wealth managers have relied on over the years. There is a plethora of free & paid software. Here are two lists of investment management software from Capterra and G2.
10. Self-Managed Active or Passive Investment
Last but not least, and the first choice of active investors, consider managing your investment without relying excessively on any second or third party.
Robo advisors, financial experts, asset or wealth managers, and the various investment & portfolio management software are valuable resources. However, you will not have complete freedom due to the inherent dependence.
All such solutions and services, whether robo or human, offer you the same advice they provide to thousands of other investors and millions, in some cases.
Thus, you are unlikely to encounter a unique gain or loss. The latter is preferably safe. The former is desirable and lucrative.
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Conclusion
Robo advisors provide passive investors with a hassle free way of managing their investments, and have truly revolutionized the financial management industry over the last several years. However, depending on your individual investment goals, you might be better served with alternate investment vehicles.
Therefore, you must fully understand how robo investors compare to other investment avenues and make the best decision for yourself.
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