Everything You Need to Know About Robo Advisors

Investment is a tricky business involving a lot of foresight, management, and careful execution. It’s easy to get diverted by the sheer selection of options in the market, and putting in the effort to plan, monitor and adjust your portfolio can be daunting. When any task appears too difficult to handle, we often turn to technology, so it’s fair to ask: what if there was an automated tool to manage my investments?

Luckily, this is very much a readily available option. Since automation has streamlined nearly every facet of life, robo-advisors are quickly emerging as an excellent option to manage one’s wealth.

If investing is your forte, then the odds are that you have probably heard about robo-advisors. The picture that pops into your head when hearing this term is perhaps of a robot that is wonderfully managing your investment portfolio. Still, robo-advisors are automated investment services that are managed by software.

What’s A Robo Advisor?

These are computer-based programs that invest and manage your money. The program will request information regarding your investment goals and then put that information through an algorithm to decide the ideal funds per your preferences. You can compare it to how Google shows results based on how the search words were typed.

Essentially, a robo-advisor is a digital financial advisor that manages investments and offers financial advice with minimal human intervention. Robo-advisors are regulated by the U.S. Securities and Exchange Commission (“SEC”) and state securities authorities.

How Do Robo-Advisors Work?

Robo-advisors use algorithms to understand and predict the investor’s preferences. This is usually done by getting the user to answer a set of questions, which is then used to generate a model portfolio. It’s important to note that each robo-advisor is different, but its operation is more or less the same. In quick steps, here is how a robo-advisor works.

1. The user answers a short questionnaire that will be used to assess their investment needs and goals, and risk tolerance.
2. The robo-advisor then automatically builds a diversified portfolio of funds. A team of investment experts generally selects this.
3. These experts will then track market activity and the underlying investment to ensure that the user’s portfolio is well-rebalanced with the help of sophisticated algorithms. This ensures the investor doesn’t have to tackle all this technical jargon.
4. Certain robo-advisors also include access to a certified financial planner or a live consultant. These professionals will help align one’s goals and offer recommendations on how to reach one’s financial goals.
5. The investor can then log in to their account to track progress, add contributions, and make adjustments accordingly.

Benefits Of Robo Advisors

Offers Easy Access

An investor only needs an internet connection to make use of robo-advisors. It’s easy to use, and the fees are significantly lower when compared to the services of a human wealth management advisor. This makes it a desirable option, especially for those who are just being introduced to the world of investment.

No Human Biases Involved

When looking for opinions from other human beings, there is always an underlying possibility of being fed biased opinions. Sometimes, even the most skilled advisor can be blindsided by their bias towards a specific asset class. Since robo-advisors use mathematical algorithms to assess the investor, they are impartial in their output.

A Comprehensive Level of Service

Robo-advisors offer various services that tackle the full spectrum of financial planning, including tax strategy schemes, retirement planning, and rebalancing portfolios. The robo-advisor will manage your portfolio to ensure you are on track to minimize liabilities and attain your investment goals.

Ability To Track Investment Priorities

Robo-advisors can effectively build investment goals based on your profiles. Setting up a robo-advisor account will trigger investors to make responsible decisions that can prove to be critical in the future. Since long-term goals such as retirement planning are generally overlooked by young investors, robo-investors have in-built mechanisms to track goals with the help of timely reminders.

Ease Of Use

Monitoring investments by themselves can be time-consuming as well as complicated. Seeking financial advice also requires a high minimum portfolio balance. Robo-advisors, on the other hand, are an accessible and more cost-efficient mode of investing.

Rebalance Aspect Is Taken Care Of

Once you have opened your account, the robo-advisor will build a diversified portfolio. The balance will likely drift over time based on market conditions, withdrawals, and contributions, and a robo-advisor can automatically rebalance investments.

Robo Advisors &Their Limitations

The lack of human intervention, as convenient as it may be in many aspects, is also a hindrance in some others. Robo-advisors are very popular among millennials, but it’s far less accepted by high-net-worth individuals with more extensive portfolios and those who want to invest a considerable chunk of their savings. These investors often seek validation through human advice, particularly during market volatility.

The uneven standards of robo-advisors are another limitation. While some robo advisors use machine learning and breakthrough AI to design portfolios, other robo-advisors may use simple methods, which could be a drawback.

Are Robo-Advisors a Good Option?

The answer to this question is mainly dependent on one’s personal motivations. A professional wealth advisor will be the ideal way forward if you want a private discussion before investing. But if you’re looking for quick access and easy transactions, then robo advisors are a good option. The average fee is between 10 bps and 50 bps, and the paid robo-advisors offer very reasonable services that are well worth the price. Bps, “bips” when you say it out loud, are basis points – each basis point is one one-hundredth of a percent or 0.01%.

Given the direction in which technology is progressing, it’s safe to say that robo advisors can become the future of wealth management. As with all automation tools, robo advisors have the scope to become more intelligent, predicting our preferences and making significant decisions. It’s still pretty early days for this technology, but it’s slowly starting to establish trust among investors, which has, in turn, caused an increase in its user base.

It’s important to remember that when choosing a robo-advisor, one should carefully consider investment strategy and fees. Investments should be monitored periodically to ensure that they align with your goals. And if your goals shift over time, plans should be changed accordingly.

Understandably, there is much hesitation when trusting your money with a software application. However, rest assured that robo-advisors are rather sophisticated and offer many excellent services for a reasonable cost. It can help those looking to find their footing on the investment ladder and be an excellent option for seasoned investors looking to save additional costs.