What’s an automated IRA?
An “automated” or “digitally managed” IRA uses technology to select the right investments for you and digitally rebalances them over time. A key advantage of these automated IRAs is that they make investing decisions for you. This makes them a good fit for people who want to outsource their investing decisions or don’t feel qualified to make their own trades. By using technology to pick investments, not humans, these automated IRAs are available at low-fees and now collectively manage billions of dollars assets. They’re offered both by younger, ‘fintech’ companies and more established financial institutions.
How do automated IRAs work?
Most automated IRAs involve a similar process:
- You open an account with one of these companies online – this usually takes minutes.
- You answer 5-10 questions about yourself, usually including your age, net worth, and attitude towards risk (this is often known as a “risk tolerance questionnaire”).
- They use this information to propose a diversified portfolio for you. That portfolio usually contains low-cost exchange traded funds from providers like Vanguard, BlackRock, and iShares.
- These ETFs are a low-cost way to get access to specific asset classes, like US and international stocks, emerging market stocks, and bonds. Your specific mix of ETFs depends on what your ‘risk level’ appears to be. Generally a higher risk-tolerance will mean more stocks (equities) and a lower one will mean more bonds (fixed income).
- You fund your account, in this case by transferring the assets previously in your 401(k).
- Once your account is funded the IRA provider will purchase the right investments to create your portfolio.
- They monitor your portfolio over time and automatically rebalance it so it remains appropriately diversified.
