What Is a Robo Advisor: Features and Advantages To Investors - Investadisor (2024)

Features and Benefits of Robo Advisor Investing

The financial services sector is undergoing a significant transformation in regard to the methods of providing financial advice and investment management services. Robo advisor investing is a product of the evolution dueto new regulatory parameters, the client’s demographic changes, and above all, rapid technological progress.

These changes are observed at a time when the need for financial product advice has never been higher.

What Is A Robo Advisor

Robo Advisor is a platform or app-based online financial advisor that helps clients to invest their funds in autopilot. Robo Advisors use a digital or Robo investing platform to offer simple, and low-cost investment advice.

They require a very small opening balance some as low as $10 and this is a major draw to small investors with limited funds to invest.

Currently, Robo advisor investing has acquired a special role in the investment sector not only to potential customers but also to traditional consultants and professional advisors.

More specifically, those who need to understand and adapt to the constant evolution of the investment environment in which they operate.

History of Robo Advisors

Robo advisors are also called online investment advisors. The first Robo advisor was established by Betterment in 2008 in the thick of a global economic crisis.

The prevailing economic uncertainty was an opportunity that brought about the creation of Betterment Robo advisor by an entrepreneur called Jon Stein.

Betterment started taking in and managing clients funds in 2010. Admittedly, the main driver for the creation of Robo advisor was to make investing super simple, and automatic. For the most part, software-driven portfolio management at a low price.

According to Wikipedia “The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession”.

Robo advisors are most popular in the United States but are also available in Canada, Europe, Australia, India and Asia.

Related: Index Funds vs Mutual Funds: What’s the investment that best suits you?

Portfolio Management

First of all, to open a Robo advisor investment account you first go to your desired company’s website and fill out the application form.

The next step, ensure you precisely answer basic questions from the questionnaire in regards to your investment background, risk tolerance, financial goals, and total available assets at your disposal.

Finally, the software automatically creates an optimal portfolio based on your investment preferences. Then your funds are invested in EFTs stocks, and bonds at optimal asset class weightings that meet your investment goals and risk profile.

The term “Robo” does not indicate the presence of real investing robots, as you imagine them. Precisely it is an algorithm that profiles each client and offers a personalized investment portfolio and adjusts it over time as economic and life situation changes.

In the traditional investing practice, you contact your investment advisor or wealth manager, who collects all the information and selects the most appropriate portfolio and investment strategy for you to follow.

However, with robo advisor the platform or app uses a computerized algorithm to determine the best asset class mix and manages your portfolio for you.

The Robo advisor investing approach reduces consulting, management, and commissions charged to you without necessarily affecting the quality of service.

Robo advisor invests your funds mainly in ETFs related to stocks, bonds, futures, commodities, real estate. The fees charged for Robo advisor range between 0.25%-0.50% and are applied based on assets under management.

Related:58 Key Investment Terminology You Should Absolutely Know

Automatic Portfolio Re-balancing Technique

Most Robo advisors apply an automatic re-balancing technique based on the proportion of your portfolio asset class mix.. As securities deviate from the original asset allocation the Robo advisor software will buy and sell shares automatically to return it to its prescribed asset mix.

Let’s assume you start with 80% stock and 20% bonds asset allocation. Due to strong economic changes the stock market index rose in value more than the bonds index. In this situation, your stock weighting in the portfolio has grown to 90% stock and 10% bonds.

The software will trigger a sale order for stocks portfolio and buy order for bonds to return it to the ideal original asset mix. This saves investors’ lots of stress, time, fees, and energy from constantly watching and re-balancing it to maintain the desired allocation

More specifically it makes the appropriate changes to the investments required to adjust your portfolio back to the prescribed allocation.

Related: 51 Best Finance Quotes to Increase Your Investing Knowledge, Money Mindset, Confidence and Inspire Your Finances

Tax Loss Harvesting Technique

A tax-loss harvesting harvesting strategy involves deliberate selling of securities at a loss. Followed by a replacement with similar security and using it to offset realized gains.
This is a fantastic tax-saving strategy especially for clients in a high tax bracket who hold investments in a taxable account.

Who Should Invest In Robo Advisor?

Rob-Advisor investing is open to the public so anyone with an age of majority can open an account to trade securities. However, according to research by Investopedia Robo advisors are most popular with entry-level affluent millennial’s who like a hands-off investment approach, and generation X with limited financial muscle as well as investment knowledge.

Also, busy professionals who don’t want to hire professional financial advisors also benefit from Robo advisor investing.

Global Popularity of Robo advisors

According to statsta market penetration for Robo advisors is currently at 2.2%.

The initial adoption rate for Robo advisor was slower than projections due to the difficulty of an emerging investment brand to convince savers buy in.

Related: Exchange Traded Funds (ETFs) Explained In Simple Terms (How Can You Make Them Work For You)

How are Robo Advisors Regulated

They’re digital advisors who operate behind the computer so they have a fiduciary duty to you (and all clients). In fact, all digital investment management services are subject to the same regulatory requirements as traditional financial advisory services.

How Much Does a Robo Advisor Cost?

Fees can range between 0.03% to 1% of the asset value held under management annually. But, there are a few Robo advisors that are free to use like betterment, M1 Finance, SoFi Invest, Wealthfront, Ally Invest Cash, and Schwab Intelligent Portfolios.

How Does Robo Advisors Make Money?

Robo Advisors make most of the money through fees charged for the percentage of assets held under management. They also charge a tiny fee on certain securities transactions, such as ETFs mutual funds, and bonds.

For hybrid Robo advisors that are offered in-person/with human to clients, they charge an advisory fee is another revenue source. They also make money through sponsored ads.

Are Robo Advisors worth it?

The new innovation has proved that investing is not rocket science, it’s super simple and anyone whose willing can do it. Their popularity will continue to grow due to the low entry fees, easy-to-use dashboard, and automated investment management portfolio.

It’s projected that overtime demand for Robo investing will start to increase. According to Wikipedia “By the end of 2015, Robo-advisors from almost 100 companies around the world were managing $60 billion in assets of clients and it is projected to hit $1.4 trillion by the end of 2020”

Related:8 Best Investing Apps For Beginners To Grow Your Money On A Small Budget

How to pick a Robo advisor

With so many companies in the robo advisor segment, it can be difficult to figure out how to pick a digital advisor that best meets your needs. Below are tips by Debbie Carlson of US news, on how to select a robo advisor.

• Set Your investing Goals – establish a clear goal that you’re saving for before pulling a trigger. If you have say three goals, for instance, saving for retirement, saving for a home, and saving for a kid’s college education. Make sure you buy three different Robo advisors that will help you reach each of your financial goals.
• Robo advisor Tools– Does the Robo advisor platform have the necessary tools to help you reach your goals. Is there a questionnaire to capture all the required information such as your goals, risk tolerance before it creates your custom portfolio. Do you properly understand what your risk appetite is, as well as risk tolerance? And has it been properly captured by the questionnaire before the platform creates an optimal portfolio asset mix.
• Ensure all fees and minimum investment requirements are properly understood.
• Is the Company properly staffed– Is there help around the clock or 24/7 if you wants to speak to a human advisor. Do they have properly trained staff to answer your questions.
• Platform ease of use– User friendliness of the platform very important to new and non tech savvy clients
• Portfolio construction– Most robo advisors offer a range of low-cost, index-based mutual funds and ETFs. Cost won’t be the same for different funds such as proprietary funds , third-party funds and in-house investment funds used to create their model portfolios.
• Not all robo advisor are right for you... So be aware if its not the right fit for your circ*mstance. Look for an alternative that can offer better investment fit or returns goals in line with your financial situation

There is no longer doubt about the usefulness and advantages of Robo advisors. Just find the one that meets your investment goals at the right price.

Robo Advisors popularity growth is due to the following factors