The millennial market has long been the toughest nut to crack in the financial advisory sector. A Merrill Lynch survey that polled 153 investors between ages 18 and 35 in 2013 found that millennials have been reluctant to start relationships with investment professionals, whom they tend to view as "salesmen."
It doesn't help that the average millennial is low-income, low-net-worth and generally of low interest to wealth advisors in the first place.
But that lack of participation could be changing with the advent of robo-advisors. Since 2008, these automated wealth management services have provided algorithm-based investment advice without human interaction -- perfect for a generation that often prefers digital interaction over face-to-face.
The services robo-advisors offer are also much less expensive than those of traditional financial advisors, which makes them a desirable option for young investors looking to build a nest egg. Here are three reasons millennials should consider robo-advisors.
Robo-advisors have low minimum investments. Traditional financial advisors provide customized, personal advice -- but at a cost. Many will only take on clients with a net worth of $250,000 or more, which excludes most millennials just starting their careers.
Robo-advisors, on the other hand, require low minimum balances to invest. Some, like online investment advisor Betterment, have no minimum balance requirement and tailor their services to beginning investors, and some lower their fees as investments grow.
By providing a small barrier to entry, robo-advisors make investing more accessible to millennials. "When you don't have $1 million to invest, you don't need anything more fancy than what someone like Wealthfront or Betterment is offering," says certified financial planner Pamela Capalad of Brunch and Budget, a financial planning firm based in New York City.
Robo-advisors charge smaller fees. Because robo-advisors use passive investing instead of the active investing used by many traditional financial advisors, they can afford to charge smaller fees than the big guys. Active investing is when an advisor or fund manager tries to choose investments that will beat the market. With passive investing, an advisor chooses a fund, such as an index fund that tracks the stocks of the S&P 500 index, as a benchmark for investing.
While a traditional financial advisor may charge fees of 1 percent or higher, many popular robo-advisors charge 0.5 percent or less. That difference can save an investor a significant amount over the life of an investment.
Robo-advisors automatically rebalance your investments. Robo-advisors offer a hands-off approach by automatically rebalancing their customers' portfolios so they stay diversified and don't hold too many assets in one investment category. This can be a draw for millennials who don't want to worry about rebalancing their investments manually or hiring a financial advisor to do it for them. For a busy young person still trying to wrap their head around the ins and outs of investing, this can be a lifesaver.
Austin Lewis, a certified financial planner with Rooted Financial Planning in Fort Worth, Texas, says automation is one of his favorite things about robo-advisors.
"Automated investment management is nice ... but automated savings is even better," he says. "The hardest part of accumulating wealth is saving money. When you link your bank account to a robo and choose your automatic savings schedule [which can be changed at any time], you just eliminated the hardest part to accumulating wealth. This single behavior will get you on the path to build wealth."
Top robo-advisors for millennials. Due to the rapid proliferation of robo-advisors, there are many options for millennials looking for investing help. When choosing a firm, look at the fees it charges and the minimum balance required to invest. Remember that fees can take a big chunk out of your earnings, so examine how much you can contribute regularly and where you can find the lowest fees.
"Robo-advisors are good for millennials ... given that there is not much of a choice out there for quality advice to young people, as most advisors focus on older, more-established clients that already have assets," says certified financial planner Jeremy E. Portnoff of Portnoff Financial LLC in Woodbridge, New Jersey.
Here are five robo-advisors to consider:
-- Betterment. This firm charges 0 .35 percent for accounts between $0 and $10,000 (if you have automatic deposits of $100 or more, $3 a month otherwise); 0.25 percent for accounts between $10,000 and $100,000; and 0.15 percent for accounts holding more than $10,000. There is no minimum deposit or balance and no fees for withdrawals.
-- Wealthfront. A $500 minimum deposit is required. There is no advisory fee for accounts less than $10,000, but this firm charges 0.25 percent on any amount more than $10,000. There is an exchange-traded funds fee of 0.12 percent.
-- FutureAdvisor. This firm offers three months of free management but charges a 0.5 percent annual fee. It has no minimum investment requirement.
-- WiseBanyan. WiseBanyan has no annual fee and no minimum balance requirement. The average expense ratio for its accounts is 0.12 percent.
-- Sigfig. A $2,000 minimum balance is required, but the firm charges no annual fee for accounts holding $10,000 or less. Any account balance of more than $10,000 is charged a 0.25 percent fee.
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