One of fintech’s many disruptions comes in the form of robo-advisors or robo-advisory services, which provide algorithm-driven financial planning and investment services. Human supervision levels range from minimal to non-existent depending on the service provider, with the typical model surrounding the collection of client information (goals, financial situation, etc.) to generate advice. Are these robo-advisors actually reliable? We take a look at some of their advantages and disadvantages:
Robo-advisors reduce the barriers to entry into the world of investing, allowing young professionals and investors without large amounts of capital to access investment management services. The minimum amount required to start investing on such platforms is usually only in the hundreds of dollars, as compared to human advisors who usually only accept clients with at least $100,000 in investable assets – giving them the upper-hand in the investing world.
2. New technology
The development of software tools which are driven by artificial intelligence (AI) is a big factor that has contributed to the growth of robo-advisories. Big data – along with the development of flexible AI algorithms and models – allow robo-advisors to compute an almost unlimited amount of functions to suit their clients’ needs. There are platforms with existing portfolios that focus on particular sectors while others offer broadly diversified ETF portfolios. There are robo-advisors out there to suit almost every investment criteria.
3. Low fees
Typically, human financial investors charge at least 1% to 2% of the value of your portfolio. This percentage acts as a management fee and may be even higher on a smaller portfolio. On the contrary, robo advisors generally charge just a fraction of 1% or offer a sliding scale depending on the amount of funds you have under their management. Some platforms even offer 0% commission on their services due to the low overhead costs of running a robo-advisory platform. When taken in totality, a reduction of management fees can significantly increase the net return on your portfolio.
Robo-advisors are ultimately just machines. Very smart ones, but still inanimate. If you prefer having the human touch when performing transactions or discussing deals then these platforms are probably not for you. A regular financial advisor will be able to discuss your short and long- term goals as well as reassure you about a potentially risky investment if need be. With that personal understanding, your advisor could be able to guide you with more clarity as compared to a robo-advisor.
2. Reaction to unforeseen circumstances
Whenever unexpected market situations arise, robo-advisors are generally not well-equipped enough to handle them. In a study conducted by Investopedia and the Financial Planning Association, 40% of consumers reported that during times of extreme market volatility they would not be comfortable using an automated investing platform. Even if most platforms do come with a manual override option, there will still be a risk that your robo-advisor doesn’t react or reacts in a way that is unfavourable to you.
Every investment tool has its pros and cons, and robo-advisors are no different. They can be amazing assets when used correctly and with caution, but it is always good to keep their limitations in mind. If you are a new investor, it may be worthwhile to speak to an experienced financial consultant for more information or do some research before engaging a robo-advisor.