The day of having a person as your financial advisor may be slowly disappearing. Investing successfully takes a lot of research and effort. Once you’ve invested, you need to constantly monitor and adjust your portfolio.
Not everyone has the time or knowledge to do this. A financial advisor can do it all for you, but they are very expensive. A robo-advisor is a solution to this problem. A robo-advisor is becoming increasingly popular in this new world where technology is the answer to all our problems.
What is a Robo-Advisor?
Robo-advisors, also known as automated investment services, use computer algorithms to manage your portfolio. Automated investing is a simple and low-cost way to invest without human intervention.
Typically, a robo-advisor asks about your financial goals, risk tolerance, and financial resources. Based on these results, it will make investment decisions and monitor your portfolio. Many services offer a robo-advisor such as Charles Schwab and Fidelity.
Understanding a Robo-Advisor
The first robo-advisor was launched in 2008 with the aim of rebalancing assets within target date funds. Portfolio allocation software has been around since the early 2000s, but the technology is now evolving.
A robo-advisor is computer software that uses algorithms to predict investor preferences and risks. They will ask you a set of psychographic questions and then model a portfolio. These questions will ask about your income, liabilities, asset allocation and willingness to take risks.
The robo-advisor takes your results and runs them through an algorithm. This will create your investment strategy and build a diversified portfolio.
Once funds are added, the robo-advisor will automatically adjust your portfolio to meet your goals.
One advantage is that they are a low-cost alternative to a human advisor. By getting rid of humans, they don’t have to charge as much, and they are available all the time. You only need internet to access a robo-advisor. Robo-advisors need less capital to get started. This makes them more accessible to a larger demographic.
Being more accessible makes them more efficient. It only takes a click of a button to trade with a robo-advisor. For a traditional advisor, you have to meet with them and wait for them to physically execute the trade.
With traditional financial advisors, biases play a big role in decision making. No matter how experienced you are as an advisor, you are human and we all have biases towards certain investments.
Robo-advisors take all bias off the table. It uses algorithms to evaluate and make decisions free of bias. The computer aspect takes away the human instinct to make rational and neutral investments.
A robo-advisor can not only manage your portfolio, but can manage all of your financial planning. It can help you with your retirement plans and make sure you’re getting the most out of your taxes. It’s an all-in-one service that helps you achieve your financial goals while taking on as few responsibilities as possible.
The technological differences between some robo-advisors are a downside. Some use artificial intelligence to learn your preferences, while some are far behind in their software.
There is a lack of personalization with some robo-advisors. They are designed for people like you, not specifically for you. They will offer you a variety of plans to choose from based on your profile. Many times, you have to go along with the already created plan and you don’t have any decision about the assets for yourself.
Removing human bias is potentially a good thing, but traditional advisors are also there to manage emotions. When the market isn’t doing well, a robo-advisor can’t tell you what the future will look like or not to panic. You can just adjust your portfolio accordingly.
A human advisor can give you reassurance that everything will be fine and their strategy going forward. There’s nothing stopping you from selling everything in times of turmoil with a robo-advisor.
Robo-advisors are significantly cheaper than a real human financial advisor. They typically charge a management fee of between 25% and 50% depending on the assets under management.
Human financial advisors typically charge more than 1% of assets under management. For example, with a robo-advisor, if you have a portfolio of $10,000, you can pay up to $50 in commissions.
With a standard brokerage account, you sometimes have to pay commissions when you buy or sell assets. Robo-advisors typically waive these fees.
Robo-advisors bridge the gap between financial services and everyday people. They have made financial planning more affordable for everyone, not just the wealthy.
The industry isn’t too sold on the idea of having an all-IT advisor. They believe that technology is not ready and human interaction is extremely important.
These are quality tools for new investors and those with smaller accounts.
According to Statista, current client assets under robo-advisor management are $987.494 billion this year. Robo assets under management are expected to grow at an annual rate of 26% between 2020 and 2024.
There is a lot of potential here with robo-advisors. Just wait and see how they evolve next.