Technology is growing at a faster pace and seeing an internet-like growth. In this technologically forward-looking society, it should come as no surprise that robo advisors are aiding people to make clever decisions about what to do with their money. Robo advisors are bringing about one of the biggest transformation in the investment World. If the term robo advisor reminds you of Terminator movie series, you are wrong; robo advisors aren’t really robots made of metals and plastics. They are automated investment services that promises to manage your finances and investment planning.
How do they actually work?
Robo advisors work by using algorithms to help clients make the finest investing decisions, balancing client’s tolerance for risk and preferred length of investment into the equation. Some robo-advisors are fully automated, while others also use humans to supplement their services. Clients fill out an online questionnaire about their income, goals and comfort with risk taking. Robo advisors then picks the best investments, often in various low-cost exchange-traded funds (ETFs). Technology then does all the work, frequently rebalancing the portfolios.
TOP REASONS TO CONSIDER ROBO ADVISORS FOR YOUR FINANCIAL ADVICE
Robo advisors could cost noticeably less compared to human advisors. If you invest through a bank, you probably pay for advice through a commission embedded in the management fees on your investments. If, instead, an independent advisor manages your investments, you may have a fee-based arrangement with them. Fee-based advisors typically charge 1% to 2% for advice, in addition to cost of investments, which can be an additional 1%. In comparison, robo advisors charge that range from 0.35 %- 0.60 % and investment expenses as low as 0.18 %. They charge less because they’ve integrated automation into their services which cuts other expenses like office space, back office processes etc.
PREFER MINIMUM INVESTMENT
Human advisors provide tailored, personal advice – but at a cost. Many will only take on clients with a net worth of $300,000 or more, which rejects most millennials just starting their careers. Robo-advisors, on the other hand, entail low minimum balances to invest. By providing a small barrier to entry, robo-advisors make investing more accessible to millennials. Betterment, a robo advisor, has no minimum balance requirement and tailor their services to beginning investors, and some lower their fees as investments grow.
Robo-advisors automatically rebalances their customers’ portfolios so they stay branched out and don’t hold too many assets in one investment category. This can be a magnet for millennials who don’t want to worry about rebalancing their investments manually or hiring a financial advisor to do it for them. For a busy young person still trying to wrap their head around the ins and outs of investing, this can be a lifeguard.
Investors favor robo advisors as they don’t have to meet an advisor in person. This saves time, is more convenient, and may ease some of the concern that comes with meeting with a financial advisor for the first time.
It suits the modern investor. Whether it’s via video chat, email, or even a phone call, investors get the service they want on their terms. They don’t have to rearrange their schedule and make a trip just to fit in that quarterly meeting with their advisor.
ACCESS TO FINANCIAL PLANNING TOOLS AND SERVICES
Robo-advisors can offer regular investors access to financial tools that have been reserved for high net worth investors. Services like tax optimization, retirement planning, Estate planning and insurance are examples of opportunities now offered to the average investor. It also offers access to private investment funds and portfolios and suddenly the average investor has just as much investing power and access to advice as those using a private financial advisor.
When robo-advisors initially started venturing out a decade ago during the financial crisis in 2008, they were largely ignored by the financial industry. But as the years passed, the number of robo advisors has increased, and the convenience of the services has multiplied, they’re likely a biggest transformation in the investment world. Their influence is climbing to the level where robo-advisors are changing the way all advisors work. As with any life choice, the investor should decide what type of investment guidance he or she needs and select either robo-advisor or human advisor to match their individual style.