There are countless investment applications in the marketplace that can make beginner investors feel overwhelmed and investment professionals feel left out.
Many investment apps have similar purposes with some nuances, so your personal criteria can help narrow the choices.
To determine which investment application is right for you, first consider which type of investor you are. Your profile characteristics, such as education level, investing goals, risk tolerance and investment timeline, can help identify if you’re a conservative, moderate or aggressive investor.
Self-evaluation is a fundamental step in determining which investment application best suits your needs and can be the difference between using appropriate portfolio strategies or losing money. Here are some tips for each type of investor:
— For beginners
— Working your way up to legacy brokers
— Maintain the human aspect of financial planning
— For the advanced or institutional investor
Investors and traders who are new to the stock market and looking to invest and/or trade throughout the week or month should turn to user-friendly apps with intuitive platforms. Most of these robo advisors have no account minimums or require a small amount to open an investment account, with low-fee options or no management fees.
Robo investing can be done on apps such as Acorns, Stash, Betterment, Ally Invest, SoFi, Wealthfront and Ellevest, among others, that also offer services beyond investing. Some of these features include automated investing using spare change, financial planning according to your investing goals, wealth management features, fractional shares and even financial counseling.
Beginners benefit by being able to start their investing journey with a little money and commission-free stock and exchange-traded fund trades.
For beginners, these investment apps are good platforms for getting acquainted with investing.
Novice investors with limited funds and those with low risk tolerance can start small and buy fractional shares. You should not expect to accumulate wealth via investment apps; rather, aim to gain an understanding of how the stock market works and how to manage your investment portfolio.
The downside to investment apps is that users can run the risk of gambling. Some apps allow options trading, for example, which involves buying and selling options contracts — similar to stock trading but much more complex, since the trader can experience an increased level of volatility and incur greater losses.
“Giving options to novice investors is like letting a 10-year-old fly a plane. There is a wealth of knowledge that needs to be acquired before you can fly a plane. The same goes for option derivatives. If you don’t know how to use them, you can lose a ton of money very quickly,” says Luke Lloyd, wealth advisor at Strategic Wealth Partners, in Cleveland.
Working Your Way Up to Legacy Brokers
These apps are a valuable introduction to basic investing strategies but may not be optimal for long-term investors. If you’re planning on saving for retirement, these starter apps are not suitable investment vehicles for you, Lloyd says.
Even though the aforementioned apps are now offering retirement planning, this new feature could be considered a simplified approach to financial planning — and an individual’s financial profile can get quite complex, especially with age.
“These investment apps try to take complicated aspects of investing and put it into very simple terms for the average person to understand,” Lloyd says.
Investors who become more educated and experienced and increase their salaries in the long term may want more flexibility in their investment opportunities.
“Your goal should be to eventually work your way up to legacy brokerages,” Lloyd says. These brokerages are among the largest financial institutions globally, including TD Ameritrade, Fidelity, Vanguard, Charles Schwab, Merrill Edge and E-Trade, among others. The legacy firms, like the newcomers, also offer apps.
Traditional brokerages will allow you to invest in thousands of different products, while the newer services may have fewer options. As a result, you “can’t get a lot of portfolio diversification (or) flexibility in these apps,” Lloyd says.
The investor profile for these brokerages is a long-term, passive investor with larger investment account balances who is seeking retirement tools such as a 401(k) or an individual retirement account. These legacy companies are well-established, trusted and have experience to anticipate market changes to adjust for clients’ needs.
The best way to get the most out of these legacy company apps is to understand the platforms’ capabilities. They provide access to more diversified portfolios, different retirement accounts and personalized services that may serve the more established investor better than the emerging robo advisors.
Maintain the Human Aspect of Financial Planning
It can be difficult for a robo advisor to take someone’s financial situation, plug it into an algorithm and generate an investing strategy. This is where the human element of financial planning comes in.
“Ease of access and on-demand service are key catalysts in the rise and adoption of financial apps by retail investors,” says Brad Hearn, president of Prudential Retail and Advice Solutions in Newark, New Jersey.
Apps aren’t a solution for financial challenges that individuals face, Hearn says. “Our research shows person-to-person advice is still critical to many people,” he says.
Hearn references a Prudential study from 2018 that shows more than half of millennials prefer in-person financial advice as a complement to digital channels for managing their money.
“That’s why we’re bullish on a future that encompasses the full spectrum of advice — from digital self-service to a hybrid model to traditional full-service approaches working face-to-face with an advisor.”
The young investor will eventually get older, maybe get a higher-paying job or potentially start a family. As life events occur, investors will need personalized attention from a financial advisor because robo advisors may not be able to keep up with these life changes.
For the Advanced or Institutional Investor
Seasoned investors or institutional investors interested in a more intricate view into their financial profile may prefer to use a platform such as Interactive Brokers, a global brokerage firm whose system includes a PortfolioAnalyst feature providing advanced investment analysis.
Platforms such as this encourage investors to take full ownership of their portfolio. Analytics and reporting capabilities are practical for those who want to see an allocation breakdown of all their holdings of mutual funds, ETFs and individual securities.
To get the most out of the platform, you need to link all external accounts, says Steve Sanders, executive vice president of marketing and product development at Interactive Brokers, in Greenwich, Connecticut.
These types of tools may be necessary for individual investors or institutions who have a large amount of assets under management and need a bird’s-eye view of their total exposure, risk and return over time. These interactive platforms help investors ultimately make sound investment decisions for themselves and their clients.
Know your starting point and have a vision of where your investment goals will take you years from now. At each stage of your investment journey, the most valuable takeaway is learning and growing into a well-educated investor.
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