Robo advisors are an excellent solution for many investors. They offer low-cost, hands-free investment management simplifying the wealth management process, but should you trust them? Are they reliable and safe?
You can trust robo advisors to provide you with the investment management fit for your risk profile. However, they’re only as reliable as the information you provide them. If the data you’ve provided is a true reflection of your risk profile, robo advisors can be reliable and safe solutions.
The rest of the article will take a closer look at all you need to know about the safety and reliability of robo-advisors. You’ll also learn why you can trust them with your money.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Why Robo Advisors Are Growing in Popularity?
Robo advisors are growing in popularity because the internet revolution has reached the financial services sector. More people are looking for low-cost solutions to everyday problems (including investing) online.
Robo advisors are a strong alternative to traditional advisors who make a lot of money on fees and commissions but still deliver underwhelming results.
Robo advisors charge low (and sometimes no) fees and still deliver comparable or better results for a specific risk profile. They achieve this because they also use some of the main investment principles of traditional advisors, such as the Efficient Market Hypothesis and the Modern Portfolio Theory. So, there’s every justification for more people to sign up with these robo platforms.
Are Robo Advisors Safe or Risky?
Robo advisors can be safe or risky depending on your preferences as an investor. They get their guidance from the responses you provide during your signup process and attempt to establish a base risk profile which they’ll follow while managing your investments.
Robo advisors will set up a risky portfolio featuring more volatile stocks for a risk-tolerant investor and stick to a safer portfolio featuring popular index funds and government bonds for the risk-averse investor.
Is Your Money Safe With Robo Advisors?
Your money is safe with genuine robo advisors. Since they first burst onto the scene, they’ve been subjected to lots of regulation and scrutiny from various bodies.
Agencies like the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) have forced policies that keep your money safe. The oversight is as tight as what you’d expect from sectors like banking, so there’s no risk of a robo-advisor disappearing with your money.
Most of them keep your money in segregated accounts within a custodian bank. The banks they choose are healthy tier-1 banks, so you don’t have to worry about defaults. In the very unlikely event of a bank default, you’ll get your money back as deposits are insured.
But that’s for the banks. What if the robo advisor company goes out of business first? Your money is still safe.
Robo advisors are legally mandated to keep their corporate finances separate from customer money. They can’t use your money to run their business. If the company defaults, your accounts will be closed, and your funds will be transferred to any other robo advisor you like.
The Securities Investor Protection Corporation (SIPC) protects against losses resulting from the failure of a robo advisor and other brokers—up to $500,000 per account. So, between the FDIC insurance for banks and the SIPC insurance for brokers, you’ll get back your money regardless of which company defaulted. Keep in mind that there’s no protection for losses due to market movement or your portfolio decisions.
How Secure Are Robo Advisors?
Robo advisor platforms and apps are very secure. The possibility of a security breach is very low due to the various approaches they use to keep your accounts and personal data safe.
Some robo advisors have now enabled two-factor authentication approaches where you need to enter your password and a code sent to your email or phone to log into your account. With this approach, it’s difficult for a third party to access your account without your consent.
Once there’s suspicion of fraudulent activity, most robo advisors will also temporarily lock your account until you get in touch with the company. So, if you keep your password safe and don’t make access to your 2FA codes easy, it’s hard to lose your money or have your investments compromised through fraudulent activity.
How Strong Is the Robo Advisor Investment Performance?
Robo advisor investment performance may be strong or weak depending on the composition of your portfolio. Investors with risky profiles may expect more returns on average than their more conservative counterparts.
On average, robo advisor customers can expect returns closely related to what’s achievable with comparable portfolio compositions put together by human advisors. So, if you’re a conservative investor who has a portfolio tracking the S&P 500, you should expect around 10% return per year.
How To Confirm That a Robo Advisor Is Regulated?
You can confirm that a robo advisor is regulated by checking the SEC Investment Advisor Search portal. All firms who manage money legally must be registered with the SEC, and robo advisors aren’t exempted. If you can’t find the advisor on that portal, you should avoid sending money to them.
FINRA also has its own BrokerCheck tool for confirming a robo advisor’s regulations. The portal will provide you with more information about the company, including all their disclosures and more.
Similarly, you can judge a robo advisor’s credibility by paying attention to their clearinghouse or custodian bank. Custodian banks mean an extra layer of security and regulation.
Other Factors to Watch for When Choosing a Robo Advisor
A robo advisor’s standing with the regulatory authorities isn’t enough to judge their overall health. Before you choose a company, you need to pay attention to the amount of funding they have and the number of assets under management.
Remember, most of these companies are private and independent. The more funding they have, the lower their chances of going under. A company with $10 billion in assets under management is likely to last longer than one with hundreds of millions.
How Robo Advisors Compare to Human Advisors?
Financial advisors have the expertise required to execute trades and construct portfolios for investors. They sit down with each investor to understand their short-term and long-term goals, their attitude toward risk, and their current financial bill of health. The advisors can then provide the best possible investment portfolio with the information gleaned from the consultation sessions.
Their job doesn’t end with the formation of the first portfolio. Instead, they keep in touch with the client, constantly re-evaluating their investment goals in line with their financial situation. In periods of market downturns, they’ll also be there to provide assurances that the investor is on the right track despite the (often temporary) drawdown.
Human advisors charge fees and commissions to provide these services.
On the other hand, robo advisors charge negligible fees, but they don’t provide the subjectivity and high-level personalization that human advisors provide. It’s not always enough to group individuals under a broad risk profile bracket.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Robo advisors are powerful solutions you can trust with your money. They’re regulated, and there’s little to no risk of losing your funds to fraudulent activity and company or bank defaults. However, the long-term safety of your investment ultimately comes down to your portfolio decisions.
If you choose the right risk profile for your goals and allow the robo advisor to create a portfolio and rebalance when necessary, you’re likely to achieve results comparable to working with a human advisor. However, a human advisor may be more relevant to you, depending on your investment approach.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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