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What Is a Robo Advisor and Why Is It Advantageous?

New Study: 64% of People Trust a Robot More Than Their Manager

If managing your investments is an overwhelming task or if your schedule does not allow you to monitor financial markets on a constant basis, a new type of online software had emerged and is gaining a lot of traction. Robo advisors could serve as a good replacement for your financial advisor if you want to cut costs and manage your wealth independently.

Without getting into some actual robo advisors reviews, let’s see why this could be an alternative for your investment plans in the future.

Robo Advisors in a nutshell

We could consider robo advisors as digital platforms providing algorithmic-driven automated financial planning services without any major human interference. Usually, such a platform is collecting information from clients (their financial situation, future investment goals, etc.) using an online survey, and uses that data in order to generate investing advice and automatically invest clients’ assets.

In 2008, Betterment was the first launched robo advisor and started to invest money from clients two years later, when it was used to rebalance portfolios within target-date funds.

Advantages of using robo advisors

Automated software carries the advantage of eliminating human labor and by doing so costs are being dramatically reduced. Typically, robo advisors charge an annual flat fee ranging between 0.2% and 0.5% of the client’s total account balance. That’s way better than the usual 1-2% charged by a human financial planner.

Availability 24/7, as long as there are no problems with the internet connection, is the second reason why robo advisors are superior. You can get that by investing significantly less capital, as companies have no minimum account requirements at all.

Efficiency had been significantly improved by automating the investment process. In the past, when a client wanted to execute a trade, he had to physically meet with his advisor first and fill out some paperwork. With robo advisors, the entire process had been reduced to a few clicks.

When should you use robo advisors?

Using robo advisors is suitable for young people with more than 20 years till retirement that have a simple portfolio with no other financial services accounts, and with a lack of investment experience. If you want to dedicate yourself to your profession, while also keeping your savings invested, automated software can handle the situation at a very low cost and without you having to allocate a lot of time.

Robo Advisors and regulation

Most of the popular robo advisors had been developed by US companies, which had to comply with the Securities and Exchange Commission regulation. Robo advisors have the same legal status as a human financial advisor and must be registered with the SEC in order to operate in the market. Also, we have the independent regulator called the Financial Industry Regulatory Authority (FINRA) and most of the popular robo advisors are currently members. The bottom line is that automated investment software operates in a safe and regulated environment, which means that they represent a viable solution for people who want to save time, reduce costs, and get access anywhere to financial advisory services.

 

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