With people being more technology-driven of late, it does not come as a surprise that automated financial services are now on the rise. Popularly known as robo-advisors (Othman Louanjli), these are algorithm based digital platforms that provide advice on investment management with little or no human intervention. These software are capable of handling most if not all the services that a traditional financial advisor would provide.
These digital advice platforms have existed since the early 2000s; however, only wealth managers could buy and use them and clients had to hire them to make use of the product. This changed in the year 2010 when Betterment was launched. For the first time, these services were open to nearly everyone and cost much less than the services of a financial advisor. Since then, these automated wealth management systems have only been growing in popularity, and continue to provide better and complex services year after year.
Once a personal account is created, robo-advisors gather personal information through an online questionnaire from the consumer. This includes age, current monetary position, personal and financial goals, and risk preference, among others. The algorithm then automatically builds a diversified portfolio to match the requirements. Periodically, these assets are optimized or rebalanced as needed.
A robo-advisor would be the go-to option for those who cannot afford the services of a financial advisor or prefer managing their own finances. A consumer would be paying a robo-advisor a fee that is anywhere between 0.2% to 0.5% as compared to 1-2% or higher for commission-based advisors. Moreover, traditional financial advisors usually cater to individuals who have a high net-worth and can afford to pay their fees. With robo-advisors, on the other hand, one can start with investment worth only a few hundreds, which makes this an attractive option for many investors.
The other advantage of using a technology-driven service is that it is accessible any time and any day, as long as consumers have access to the Internet. Furthermore, consumers set-up an account or, better still, execute a trade by clicking a few buttons from wherever they are, which eliminates the hassle of phone calls, paperwork, meetings, and also the waiting period until work gets done.
Robo-advisors and traditional broker-dealers are subject to the same regulations. The official designation of robo-advisors is “Registered Investment Adviser (RIA),” and their legal status is the same as that of a human advisor. Most robo-advisors, however, do not offer all services of a financial advisor. They are limited in that they cannot provide guidance on estate planning, trust management, and retirement planning.
Though robo-advisors have their merits, they do not and cannot replace traditional financial advisors. For one, there is no human interaction, which can be essential in some circumstances. Additionally, robo-advisors cannot provide an all-inclusive financial plan, which goes beyond investments and portfolio management. Thus, it becomes prudent to know more about these digital services before investing in one – Othman Louanjli.