Should I Use a Robo-Advisor in Retirement?

happy couple drinking coffee and looking at tablet

It uses computer algorithms and advanced software to build and manage your investment portfolio, but is it right for you?

You worked hard, and now you’re retired! Hooray! So what’s the best way to manage your retirement portfolio? Check out the pros and cons of doing it yourself or using a robo-advisor.

What is a Robo-Advisor?

Also known as “automated investing services or online investors,” robo-advisors use computer algorithms and advanced software to build and manage your investment portfolio. The services they offer can range from automatic rebalancing, to tax optimization. They require little to no human interaction, although many providers have human advisors available for questions.

Robo-advisors were initially created in 2008, and started becoming more mainstream by 2010. Many robo-advisors primarily use exchange-traded funds (EFTs) as their investment type. Oftentimes, these portfolios include a mix of asset classes, like stocks and bonds. They might also include other asset classes, such as real estate, natural resources, or commodities.

Robo-advisors are growing in popularity as part of the retirement planning discussion. Here are a few pros and cons to using an automated, online investor.

Pros of a Robo-Advisor:

Simplified approach

One of the main reasons for their growing popularity is the ability to access them online. Many investors like setting up and managing their account from a computer or smartphone. Essentially, you’d answer a few questions to access your risk tolerance and goals. Then, the robo-advisor presents suggested portfolio allocations, and gives you the option to make any changes.

Streamlined investing

Robo-advisors are able to build a diversified investment portfolio quickly. Some investors find it quick to set up an account, and begin executing trades. In addition, some financial advisors are beginning to incorporate automated platforms to improve efficiency of portfolio management.

Immediate diversification

Many investors like the ability to invest in a diversified portfolio based on modern portfolio theory research. This method emphasizes your overall allocation to different asset classes like stocks, bonds, and real estate.

Low-cost investments

Robo-advisors can provide a lower-cost alternative for asset management. These platforms have fewer human employees and storefront locations. This can allow for less expensive fees and a lower overall cost.

Tax-loss harvesting

Many robo-advisors offer tax-loss harvesting for taxable accounts. This involves selling an investment which lost value, and replacing with a similar investment. Then, using the investment you sold as a loss, as a way to offset capital gains . This process has the ability to potentially enhance after-tax returns, but not be helpful for investors depending on your tax bracket.

Cons:

Lack of personal guidance

Some robo-advisors might be a hybrid model, which includes a human advisor. However, most automated investment platforms do not provide access to a CERTIFIED FINANCIAL PLANNERTM professional. Aside from being able to talk to your advisor about your portfolio, your advisor will get to know you as a person. They’ll help with every facet of your finances, like prioritizing goals, cash flow needs, and keeping your retirement portfolio on-track.

Advice is only a component of financial plan

What are your goals, and what’s your timeline of needing to reach them? Are you contributing to a kid or grandchild’s college education? Considering if you should pay off your mortgage? Or are your goals more short-term, like planning for a trip? Depending on your needs, your investments need to be tailored to fit your situation. Currently, robo-advisors aren’t able to adequately identify if it makes sense to save for emergencies, pay down debt, or invest.

Doesn’t prevent fear-based investing decision

While automated investment platforms can create mechanical investment plans, it can’t fully replace financial planning guidance. Even an algorithm can’t prevent emotional or irrational decision-making. While it can be efficient to get financial advice from automated platforms, it can be helpful to have an experienced human guiding your decision-making.

Lack intuitive risk tolerance assessment

When it comes to your comfort level with risk, there are many scientific principals and research to understand why a human behaves a certain way. The questions to determine your risk tolerance level require a basic financial understanding that relate to real-life scenarios. Some robo-advisors use an online questionnaire to assess risk tolerance and goals. However, there are often many components of risk involved in the investment process. No algorithm or equation can consider every aspect and be 100% accurate. A human financial advisor should work to dig deeper, and have a more in-depth discussion to fully understand your unique situation.

Not all offer guidance on earning income during drawdown

The main reason for saving for retirement is for you to use those funds in retirement. As you enter the distribution phase, it’s important to have a drawdown strategy. Your strategy should be both tax-smart and focused on maximizing your income. If you’re using a robo-advisor, it’s important to make sure it will set you up for success. Some robo-advisors might have the capability to factor this type of guidance into the equation, but others may not.

If you’ve been handling your retirement portfolio yourself, now is a good time to talk to a CERTIFIED FINANCIAL PLANNERTM professional. We’re here to help you achieve your goals, and are with you every step of the way.

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Sources:

What Is a Robo-Advisor and Is One Right for You?, Nerd Wallet

Investing for Retirement Though Robo-Advisors, The Balance

Using Tax-Loss Harvesting to Improve Investment Returns, Investopedia

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect again risk; it is a method used to help manage portfolio volatility.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking error. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
This information is not intended to be a substitute for specific individualized tax advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.