Machines that pick investments and manage portfolios are known as robo advisors. They use computer algorithms to manage investments, usually at a lower cost than a human advisor.
Proponents say investors not only save on fees, the machines provide features like automatic portfolio rebalancing and tax loss harvesting.
In a recent study of the most popular robo advisors, personal finance publisher NerdWallet picked Wealthfront and Betterment as the best overall. Both won points for their low account minimums, ease-of-use, and cool features.
But some investors may need that human interaction. The Pennsylvania Department of Banking and Securities advises investors to ask seven questions before signing up with a robo advisor.
"While these online services may provide short-term convenience, investors should evaluate robo advisors in accordance with their long-term investment goals," said Pennsylvania Secretary of Banking and Securities Robin Wiessmann.
Investors should stay engaged
And while robo advisors offer a lot of services usually reserved for wealthy investors, Wiessman says it's still important for investors to stay engaged and not depend entirely on a machine.
The questions Wiessman says need answering are:
- What are your investing goals and how do you want to reach them?
- What are the costs of using a robo-advisor compared to using a human advisor?
- Is your personal information safe with a robo-advisor?
- Are you willing to stop or decrease the amount of investing advice you receive through human interaction?
- What are the different approaches to investing used by different robo-advisors?
- Is your money being directly invested or sent to other funds ("feeder funds") that might charge additional fees?
- Is the robo-advisor properly licensed?
Wiessman says no matter whether your advisor is a person or a robot, investors still need to clearly understand what is being done with their money. And it may take a little sleuthing.
"The relationships between robo-advisors, investment products, fees, and other companies and funds are not always clear,” she said. “Investors should always investigate before investing."