a practical option for Generation Z who are new to investing
Let’s say you have a bunch of money that you are willing to invest.
If you’re like me, you probably don’t want to spend all of your time staring at a screen actively trading Robinhood. You want to grow your money, but you don’t want to think about it all the time. Maybe the thought of interacting with an investment professional gives you anxiety, or the fees seem high.
You’re not alone.
A study of 3,000 American adults conducted by Vise, a technology-based investment management platform designed for advisors, which was outsourced to USA TODAY found that the biggest barrier to working with an advisor is concern for cost (43%).
Here is what I did: I skipped the personal investment advisor and got a robot to build my portfolio.
Roboadvisers, digital applications that use algorithms to build investment portfolios, are an increasingly popular investment vehicle, especially for young adults who want a simple and mobile-friendly tool.
You can download an app and complete a survey on yourself with questions such as your age, income, and risk tolerance. Based on these answers, roboadvisers generate a portfolio of stocks and bonds for you to maximize your long-term returns.
These investment vehicles can scale considerably with low marginal cost because the portfolio is generated by algorithms. Since they take the human element out of the investment, they can serve millions of customers at a time with just a few lines of code.
Many roboadvisers are designed for young investors, especially Millennials and Gen Z customers.
Gen Z, born between 1997 and 2012, began entering the workforce shortly before the COVID-19 pandemic hit and when unemployment rates were at historically low levels. Unemployment rates then skyrocketed and then stabilized. And these workers are starting to save for their retirement at an unprecedented young age, according to the Transamerica Center for Retirement Studies, a nonprofit.
Similar to millennials, born between 1981 and 1996, these young Americans struggle with student loans and credit card debt, but want to invest for their retirement and build up savings.
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“Millennials and Gen Z grew up digitally, and they expect they can manage their money the same way they order products from Amazon or call a car on Uber,” says Kate Wauck, director of communication at Wealthfront, a roboadvising company. “These young investors don’t want to have to pick up the phone or walk into a stuffy office to manage their money.”
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Most investors want a financial advisor but don’t trust robots
Despite young investors’ familiarity with digital tools, the same Vise study found that nearly half of Americans (48%) trust human financial advisers, compared to just 11% of Americans who trust roboadvisers.
Two percent of total respondents and 4% of 18-24 year olds used roboadvisers. Three percent of respondents aged 25 to 49, 1% aged 50 to 64, and 0% of those 65 and over had tried roboadvisers.
In contrast, 41% of people over 65 report working with a financial advisor, compared to 26% of Gen X, 17% of Millennials, and 14% of Gen Z.
“People, young or old or whatever, trust a human being, especially with their most personal good, which is money,” says Samir Vasavada, founder and CEO of Vise and a member of the generation. Z himself.
Robot options to consider
Despite low adoption rates, a wide variety of roboadvising options exist depending on your investment goals..
SoFi Invest allows clients to invest with just $ 5 and charges no management fees, according to The RoboReport from Q2 2021. On average, roboadvisers in the report charged a management fee of 0.35%.
Another option that provides portfolios for sustainable and socially responsible investing is InteractiveAdvisors if you want to buy from companies who share your values. Betterment also offers certain options for ESG (environment, social and corporate governance) investments, including climate impact, social impact and broad impact.
Betterment is ideal for new investors with its “intuitive dashboard” and “an excellent suite of educational tools,” says The RoboReport.
According to the report, Wealthfront has the best financial planning tools, including features to model home buying and future equity.
Axos Invest and SigFig have the best annualized returns, according to Nerdwallet data from December 2017 to June 2020.
Other roboadvisers aim to change the financial landscape for new investors, including women. Ellevest, for example, is a roboadviser designed by women and designed for women investors.
Roboadvisers: advantages and disadvantages
Be certain, Roboadvisers have their fair share of advantages, but also disadvantages.
Roboadvisors tend to charge pretty low rates and use Nobel Prize winning algorithms on your money. However, unlike traditional financial advisers, roboadvisers aren’t as personalized to your specific goals, Vasavada explains. They also don’t have a long track record to prove their success.
So far, roboadvisers have had mixed annual returns of 1% to 5%, according to NerdWallet.
“I would give roboadvisers about 25 years before they compare their returns to the traditional method,” says Danetha Doe, financial expert and creator of Money & Mimosas, a financial wellness platform.
Despite the uncertainty around roboadvisers, Doe encourages women to invest as early as possible.
“Roboadvisers have made investing accessible to more people. As we move into a more inclusive economy, I fully support those who choose to work with a roboadviser, ”says Doe.
Roboadvisers are highly regulated and are considered a safe investment vehicle. They must register with the Securities and Exchange Commission and are subject to the same securities laws and regulations as human advisers. Most roboadvisors are also members of the Financial Industry Regulatory Authority, a brokerage oversight body and the self-regulatory arm of Wall Street.
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Vasavada believes that the future of the personal investment industry lies in a hybrid approach, where technological solutions such as roboadvising are combined with human investment advisers.
On the one hand, advisers will have to evolve by integrating technology and adapting their services to young investors. On the other hand, roboadvisers are starting to integrate more human services into their platforms, Vasavada points out.
For example, E * TRADE has integrated 24/7 online chat on its mobile and web platform, while Merrill Guided Investing has added educational resources and financial planning tools.
“I think the future of space still belongs to financial advisers. However, I think there is a place for roboadvisers. And I think roboadvisers are here to stay,” Vasavada said.
Ultimately, the main draw of roboadvisers is their convenience. You could install one on a Sunday just sitting in your bed on your phone, which is exactly what I did.
When researching young investors, Wealthfront found that many of them liked not having to interact with anyone.
“We have designed our product so that everything can be done directly in our application through software,” says Wauch. “From day one, our customers have told us, ‘We are paying you not to talk to me’.”
As a young investor and roboadvising client, I totally agree.
Michelle Shen is a Money & Tech digital reporter for USATODAY. You can reach her @ michelle_shen10 on Twitter. She uses Wealthfront as a roboadviser.