The rise of the machines has long been a part of science-fiction. They’re also an ever-increasing fact of real life. And while we may be a few years away from being chauffeured everywhere in self-driving cars, having our financial portfolio managed by an automated “robo-advisor” is an option available to us right now. This may be a thrilling notion to some, and it could be a terrifying one to others. But regardless of where you stand on the concept, it’s wise to be equipped with some knowledge on what robo-advisors can do for investors.
A robo-Advisor is an online, automated wealth management service that can give investors portfolio management advice through the use of algorithms. Their presence effectively eliminates the need for investors to tap the services of human financial planners to procure guidance. Robo-advisors use the same software as their human counterparts to make these decisions, thus furthering the similarities between the two camps.
Typically, a robo-advisor is set up to just handle an investor’s portfolio management. They aren’t necessarily capable of providing advice on more personal, complex wealth management issues like estate planning, taxes, or retirement strategies.
Why Are Robo-Advisors Appealing?
The argument to using robotics over humans in settings such as manufacturing or other similar industries is that they tend to cost lower. Robo-advisors are no exception, which is an immense part of their appeal for investors. But the fact that they tend to be cheaper is not the only reason why they’re so appealing. They tend to also have low account minimums, too. They also offer their wares online, which is something that seamlessly jibes with the increased interest in online trading as a whole. Furthermore, they tend to provide a more direct route of information between investors and management services, as there is no middlemen to clog up the communication with additional service bundles or things of that nature.
When you combine these metrics, it’s not too surprising to note that robo-advisors are a particular hit amongst the Millennial generation of investors. These young investors tend to find doing things via online much more appealing, and a robo-advisor and its use of algorithms seem perfectly suited for this mindset. The low account minimums and lower bottom line, in general, can also be attractive features as they strive to build up their portfolio and their bankroll.
Not All Robo-Advisors Are Alike
Just because of robo-advisors offer automation, this doesn’t mean they’re all alike. Indeed, there are various metrics that separate one robo-advisor from another, including business models, services offered, and costs.
This is important to note because the world of robo-advisors has proliferated immensely over the past several years. It’s not just young guns jumping into the fray, either. Traditional institutions like Fidelity, Schwab, and Vanguard are all part of the robo-advisor universe. This has made the act of investing through a robo-advisor a tricky proposition even before the actual act of robo-advising commences.
Fortunately, the act of finding the right robo-advisor isn’t too far removed from finding a more traditional brokerage firm. Company research, reviews from various business sectors, and cost effectiveness relating to your personal budget are the prime movers that must be taken into consideration when choosing the right robo-advisor.
How Do They Work?
Even though robo-advisors differ from one service to the other, they do have a few common traits present. Typically speaking, the products use technology and very sophisticated investment management algorithms to produce cost-effected investing platforms. Some of these robo-advisors are coded to provide assistance for wealthier investors, while others are tailored to suit the needs of beginners. Investors can also communicate with an assisted advisor via phone, email, or video chat. This is a major departure from traditional financial advisors, who often make these interactions on a face-to-face basis.
This leads us to the proverbial elephant in the room – returns. Currently, there is no clear cut information that can be extrapolated to show whether or not investors lose an edge on their returns by using robo-advisors. Even though robo-advisors roll with an index fund investing approach, which is a strategy that has a proven track record for market matching returns, the fact is that there are simply too many factors and unique situations to make a fair comparison between one camp and the other.
The Downside of Investing Through a Robo-Advisor
While automation provides cost-effectiveness and ease of transactions, the downside that some investors may find with using a robo-advisor is that they limit the amount of human interaction that would exist within a traditional setting. Those that prefer a “DIY” approach to investing or are extremely tech-savvy probably won’t run into this issue. However, people that are used to a more hands-on approach to investing may find the lack of a human touch to be a bit impersonal.
For those that are in the middle, some robo-advisors have adapted a strategy that pulls from both realms. Some traditional advisors have integrated technology assisted platforms to offer the chance for investors to dip their toes in the robo-advisor world without completely abandoning the human element of financial advice. This hybrid has created a unique blend of investment options that are available to investors, but they have also blurred the lines regarding fees and service models. As such, it’s imperative that these shifts are taken into account by investors as they craft their own investment strategies.
The Wave of the Future?
There are no signs that point to robo-advisors taking the place of traditional financial advisors so that traditionalist can take heart in that regard. However, this option is not going away, and it will continue to flourish. The best evidence of this can be seen by the number of traditional brokerages getting involved in the game, even to the point of trying to tweak the system to provide traditional and automated advice all at once. As such, investors that are curious about the robo-advisor process can be assured that it’s a rock solid service that they can use to help grow their portfolio over time.