Earlier, if one had to invest, there were primarily two choices. Either do-it-yourself by researching stocks and mutual funds or hire a brick-and-mortar financial advisor. Not so long back, one more category of ‘online advisors’ have come up – the Robo-advisors, who use algorithms and artificial intelligence to advise clients remotely.
Who are Robo-advisors?
They are online advisors that use complex software to provide financial advisory services with minimal human intervention. They leverage technology to provide personalized financial advice and solutions.
How does it work?
Robo-advisors recommend personal portfolios for individuals, based on their goals and risk-taking appetite, usually with the help of algorithms. This begins with asset allocation – as in the proportion of investment into stocks, bonds and cash. Then, for each of these assets, they choose the sub-assets (large-cap, midcap equity funds etc) based on the goals under consideration. Depending on the need, they also rebalance portfolios.
Advantages of a Robo Advisor
Many researchers have found that most investors tend to make emotional investment decisions (because of short-term volatility) which can prove deleterious to their goals. By automating the investment process with the least human interventions, one eliminates such risks.
Some robo-advisors also act as registered financial advisors that can provide financial advice for a fee. This fee can often be lower than what is charged by traditional financial advisors.
Another advantage is that of convenience. Whenever you want to execute a trade, you can just log in to the online platform and make the recommended purchases instead of having to reach out to a broker.
Lastly, Robo-advisory services have been found to be useful especially for those without experience in investing and not knowing where to start. By investing, they start somewhere rather than searching for an optimal solution from the beginning itself.
Can Robo advisors replace traditional financial advisors?
Not in every way. Once your portfolio becomes big and an element of complexity creeps in, you might find it difficult to fit into the typical investment planning mould of a Robo advisory. For instance, an estate planning or tax-related challenge would require you to talk to an advisor and seek customized investment solutions.
Constructing a financial plan is an art as well a science. It’s about understanding the deepest emotions of investors, their aspirations, fears and other psychological aspects which could be known through interviews and personal discussions. Then the scientific aspects take over whereby a comprehensive plan is made based on the investor’s cashflows, assets and liabilities. So, after a point in time, you might also feel the need to call someone for help with your money-related queries.
What should investors do?
Technology-savvy and young investors can easily start investing by using the services of a Robo-advisor. With no asset-based limitations, they can straight away start the systematic way of investing.
However, a robo-adviser can’t provide an optimal solution in every case. Some will invariably require a bespoke plan, guidance as well as a reality check.
So, if you have unique investment needs, seek personal advice from a financial advisor. In the near future, also expect the new-age financial advisors to use a hybrid model of both science and human-based advice.
The hands-off Robo-advisors gets you started in the world of investing with the least cost. It gives a good starting point. However, once your wealth grows and needs become complex, you might require the services of a personal advisor who goes beyond complex calculations and spreadsheets to find a match between your dreams and reality.