Robo-advisors are referred to as computerized investment software designed to provide investors with possible financial advice, consultation, and portfolio management. They can also be referred to as “digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.” A robo-advisor does the work of a broker in guiding an investor through investments or other financial commitments. It also helps you self-manage your portfolio. It is quite easy to use robo-advisors the basic requirements include setting up a robo-advisor account with any robo-advisor service provider and then provide necessary input through a questionnaire that would be assigned to you. The robo-advisor would then process the information that you have entered and give responses according to your input. The slight disadvantage with robo-advisors would be the fact that the quality or level of advice our guidance you receive would be determined by the information you provide. The output or results produced by the robo-advisor would provide the right approaches towards portfolio diversification and asset allocation to help you rightly meet your investment target per time.
Another perk about robo-advisors is that they can help you sell some of your securities at a loss and offset gains in other strategic securities. Alongside help rebalance your portfolio by making changes to certain investments which play a vital role in aligning a portfolio back to its target allocation. The demand of robo-advisors has greatly increased over the years as the total of clients’ assets managed by robo-advisors in 2015 reached $60 billion and estimated to hit $2 trillion in 2020.
How Do robo-managed Investments Work?
Robo-advisor service providers make use of exchange-traded funds or mutual funds to build investor-portfolio rather than using individual stocks. The robo-advisors are bound to an index fund approach which requires target allocation to stocks. Asides the index fund approach, other approaches can be deployed so long as they meet current portfolio theory requirements for stock allocation.
Benefits of Robo-advisors
Robo-advisors provide investors with lots of opportunities and benefits such as;
Invest smaller amounts at low costs
Automate your investment process
Compared to using a real-time human advisor, robo-advisor fees are quite preferable. Robo-advisors offer a minimum monthly fee of $15 and a maximum monthly fee of $200 depending on the quality of service you choose and your portfolio value. The fees can be deducted using the percentage of assets costing where the yearly charge is calculated by taking out 0.15% or 0.50% off the total value. Extra charges are also taken on every expense connected to the robo-advisor investments such as exchange-traded funds and mutual funds which have fixed fees attached to them.
Who can use robo-advisors?
Robo-advisors are great investment assistance tools and offer lots of benefits, however, they are not the ultimate as they still have a few technical limitations compared to using real brokers. They can be used by all types of investors for different reasons—amateur investors, expert investors, investment professionals, and investors who prefer to work without financial advisors. On the other hand, robo-advisors may not be suitable for investors who prefer human advisors instead of automated advisors, investors who prefer a customized approach, and investors that possess multiple investment accounts.