A Guide to Robo Advisors : What is a Robo Advisor?

Due to the easy accessibility to the technology, Robo advisor is becoming a viable option for managing wealth in a world where automation has permeated in every aspect of life. Since it is available at low-cost compared to the traditional advisors, it has attracted attention of investors. It helps the investors by automating financial management. Hence, it is also known as ‘Auto-pilot’ for investors. In this article you can understand about Robo advisors in depth.


What is a Robo Advisor?


A Robo Advisor is a low cost digital financial tool that uses computer algorithms to build and manage investment portfolios. They offer digital financial advice based on mathematical principles or algorithms. These algorithms are developed by data scientists, investment managers, and financial advisors and programmers apply it in softwares. Robo advisor works without the need of human advisors, the software can give its users reliable investing advice. Hence, they are seen as feasible options for investors for managing their wealth.


Definition:


“an online application that provides automated financial guidance and services”


How does Robo Advisors work?


To study and forecast investor goals, risks, and preferences, Robo advisors use mathematical rules (principles) or algorithms. To begin with, they collect necessary data from the investors. Questions about gender, income, liabilities, risk tolerance, and current asset allocation are all part of the most fundamental profile questionnaire.


But, Some of the Comprehensive Robo advisors will look for more accurate information through data and artificial intelligence. To comprehend the actual financial behavior of the investor, they analyze financial transactions such as investments, bank, and credit card transactions. Comprehensive robo-advisors can assess your financial behavior and your tendency for certain behaviors using these in depth information.


After collecting necessary data from the investor, robo advisors will use them to build an investor profile. Based on the investor profile, Robo advisors will suggest investment strategies.This will provide investors a strategy for asset allocation and assist them in creating a diverse investment portfolio that satisfies their objectives.


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What is the cost of Robo Advisor services?


In general, robo-advisors have a low expense ratio. The fees charged by robo-advisors can be either a fixed monthly fee or a percentage of assets. Fixed monthly costs might start at just $1. The range of percentage fees is around 0.15 to 0.50 percentage of assets.


These fees often vary depending on the size of your portfolio. On each transaction, certain robo-advisors may add on an "expense" or trading fee. The funds the robo invests in may also charge a fee or expense ratio. However, using a robo-advisor often has a cost of less than 1% total.


The fees charged by robo-advisors are lower than those of traditional advisors. Many investors may find this appealing, especially new investors who are drawn to the low account minimums and the ease of online access. Investors can benefit from better performance from their portfolios with the aid of robo-advisors. However, robo-advisors typically provide fewer services, and they might charge wildly different amounts.


Are Robo-advisors a good investment?


Yes. Robo Advisor is a good investment for a new investor as robo-advisors may offer a cost-effective and convenient approach to begin saving money for the future. Robo advisors are easily accessible and have low minimums to start. They also offer a lot of advantages, but they might not be the ideal long-term plan because they can't offer comprehensive financial planning services. Instead, they're a terrific way to start investing before you eventually seek out a financial advisor.


Can I trust a robo-advisor?


Yes. You can trust Robo-advisors, as the algorithms used by many robo-advisors are based on investment theories like Nobel Prize-winning investment theory “Modern Portfolio Theory”. The MPT theory emphasizes diversification as an essential factor.


Generally speaking, the Robo Advisors application of investment theory aims to build a portfolio of investments with the highest return at the lowest risk. They adapt proven most effective algorithms and suggest the best possible portfolio according to your preferences.


What are the Advantages of Robo Advisors?



  • No prior investment experience necessary

  • Low fees

  • Easy Access and simple to use

  • Robo advisers are created using proven economics models


Like everything in the world, Robo Advisors have positives as well as negatives. Some of the advantages of Robo Advisors are as follows.


No prior investment experience necessary :


Robo-advisors are a great choice for new investors. Even if they don't have the financial knowledge necessary to make smart choices, they can start investing. This is the perfect entry point for new investors to start their investment journey.


Low fees :


A survey conducted by Delloite of almost 100 platforms found that Robo Advisors charge between 0.02 percent and 1 percent of investment portfolios yearly, compared to typical wealth managers who charge between 2 percent and 3 percent.


Easy Access and simple to use:


To use a robo-advisor, all you need is an internet connection. The majority of robots are made to be simple and user-friendly. As a result, they are hassle-free for the majority of people to access and understand.


Robo advisers are created using proven economics models :


The economics models used by the Robo Advisors aim to achieve maximum returns with minimum risk. At the same time, they are proven and largely accepted. These economic models are given by renowned economists.


Dis-advantages of Robo Advisors :



  • Limited investor choices

  • Lack of Human Touch

  • Lack of equal technology adaptation


Let's look into the limitations that follow Robo advisors.


Limited investor choices :


Robo-advisors often only provide a limited number of exchange-traded funds as investing options. Because of this, many of them may not be a good fit for investors who want to purchase individual assets or pick from a wider selection of funds.


Lack of Human Touch :


Minimum human intervention can also be seen as a drawback. Because, financial advisors can understand numerous things that a Robo Advisor may not. The human touch that comes from financial advisers is something that some people find absent in robo advisors


Lack of equal technology adaptation :


Not all the Robo advisors are adapted to advanced technology. There is a presence of unequal adaptation of technology and data collection systems. While some robos on the market today construct portfolios using cutting-edge AI and machine learning, the majority still employ simplistic techniques.


Final Thoughts :


It is predicted that in the coming days Robo advisors will grow widely, and the future of wealth management. As of today, they have some of the exceptional features and they are known for user friendliness. Yet, they have flaws that need to be corrected in the future with the help of innovation and creativity.


If you want a hassle-free, easily accessible and low-cost investment advisor, Robo Advisors should be your first choice.