The day of having a person as a financial advisor may be slowly going away. Investing successfully takes a lot of research and effort. Once you have invested, you have to monitor and adjust your portfolio constantly.
Not everyone has the time or knowledge to do so. A financial advisor can do all that for you, but they are very expensive. A robo-advisor is a solution to that issue. A robo-advisor is coming more popular in this new world where technology is the answer to all our issues.
What is a Robo-Advisor?
Robo-advisors, also known as automated investing services, use computer algorithms to manage your portfolio. Automated investing is a straightforward, and low-cost way to invest without human intervention.
Typical 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 like Charles Schwab and Fidelity.
Understanding a Robo-Advisor
The first robo-advisor was launched in 2008 with the purpose of rebalancing assets within target-date funds. Portfolio allocation software has been around since the early 2000s, but now the technology is evolving.
A robo-advisor is computer software that uses algorithms to predict investors’ 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 construct a diversified portfolio.
Once funds are added, the robo-advisor will automatically adjust your portfolio to meet your goals.
Benefits
One benefit is that they are a low-cost alternative to a human finial advisor. By getting rid of humans, they do not have to charge as much, and they are available all the time. You only need the internet to access a robo-advisor. Robo-advisors take less capital to get started with. This makes them more accessible to a larger demographic of people.
Being more accessible makes them more efficient. It only takes one click of a button to make a 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 do play a role in their 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 bias-free decisions. The computer aspect takes the human instinct out of it to make rational and neutral investments.
Not only can a robo-advisor manage your portfolio, but it can manage your whole financial planning. It can assist in your plans for retirement and make sure you are taking advantage of all taxes. It is an all-in-one service that helps you reach your financial goals while taking on as few liabilities as possible.
Disadvantages
The differences in technology between some robo-advisors is a negative aspect. Some use AI to learn your preferences while some are far behind in their software.
There is a lack of customization with some robo-advisors. They are designed for people similar to you, not you specifically. They will offer you a variety of plans to choose from based on your profile. Many times, you have to go along with the plan already created and do not have any decisions in assets for yourself.
Taking out human bias is potentially a good thing, but traditional advisors are there to manage emotions as well. When the market is not doing well, a robo-advisor cannot tell you what the future will look like or not to panic. It can only adjust your portfolio accordingly.
A human advisor can give you the reassurance that everything will be okay and their strategy going forward. Nothing is stopping you from selling everything during times of turmoil with a robo-advisor.
Costs?
Robo-advisors are significantly cheaper than an actual human financial advisor. They typically charge a management fee normally between .25% to .50% based on assets under management.
Human financial advisors normally charge over 1% of assets under management. For example, with a robo-advisor, if you have a $10,000 portfolio, you may pay up to $50 in fees.
With a standard brokerage account, you sometimes have to pay commission fees when you buy or sell assets. Robo-advisors normally waive these fees.
Future
Robo-advisors are aiding in the gap between financial services and everyday people. They have made financial planning more affordable to everyone, not just the wealthy.
The industry is not too sold on the idea of having a fully computer-based advisor. They believe the technology is not ready and human interaction is extremely important.
They are quality tools for new investors and those with smaller accounts.
According to Statista, current client assets under robo-advisor management are at $987,494 m this year. The robo assets under management are expected to grow at a 26% annual rate between 2020 and 2024.
There is a lot of potential here with robo-advisors. Just have to wait and see how they evolve next.
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