What is a Robo Advisor and How Does It Work?

Making investments is always a matter of balancing profit probabilities and uncertainties of losses. But if you are caught up in the hecticness of life, you might not have the time to calculate the risks. In this case, you will certainly find robo advisors useful.

You may be asking: What is a robo advisor and what does a robo advisor do? In this article, we’ll tackle the basics of this financial tool.

What is a robo advisor?

What is a robo advisor?

Robo advisors are basically digital financial advisors. The technology, built by financial and investment experts, data scientists and programmers, aim to independently provide accurate investment advice to its users without the need for human advisors. They perform as portfolio managers, offering convenient ways for users to set-up financial accounts and allocate client funds in diverse investment products.

How do robo advisors work?

How do robo advisors work?

Utilizing algorithms, robo advisors’ function through collecting relevant information from its users, such as their current financial situation, investment goals and timeline, and risk tolerance.

After a robo advisor collects your data, it will assess your information to curate a financial portfolio for you. Some software companies provide a robo-investing service, where the software itself sets up accounts for its users.

Most robo advisors continue to assess your portfolio as you contribute to your funds regularly. These also make sure you are on track with your financial goals by automatically rebalancing your investment products as you update your information.

Pros and cons of robo advisors

Pros and cons of robo advisors

Like every financial decision, choosing to use a robo advisor has its benefits and disadvantages. Now the question is, should you use robo advisors? Here are some pros and cons you should consider.

1. A robo advisor provides lower fees

Robo advisors tend to price less than traditional financial advisors. Generally, their services cost only around 30% of that of financial advisors. The flat fees are generally their selling point for most users.

Other than their low annual costs, most robo advisors also allow people to use their services with zero to low minimum balances. This makes them accessible for even beginner investors or those who live with a tight budget!

2. It incorporates risk guidance and management

Over the years, more and more people are looking into investing in exchange-traded funds (ETFs). The popularity of this type of investment product might be attributed to its low costs and risks but promising rewards.

Without requiring a minimum amount for investment, ETFs promote inclusivity among its users. In other words, anyone can invest in ETFs. However, not everyone has the time to strategize their portfolio diversification. And this is where robo-advisors come into play. Robo-advisors create diversified portfolios using low-fee ETFs. The technology automates the best investment strategies for its users.

Using a robo advisor does not remove the uncertainties of making an investment; it allows you to make smarter decisions with your money. So, if you are a busy person who needs financial guidance and yet do not want to spend a lot of time researching and managing your investments, then a robo advisor will definitely help you grow your assets passively.

3. It is accessible and straightforward

A robo advisor is no different than most technology products we’ve embraced so far. As long as you are connected to the internet, you can instantly access its services from anywhere at any time.

If you are well-versed in technology, you will appreciate the convenience of using robo advisors. The software product is straight forward — it allows you to execute your decisions with a few clicks.

4. It is not human

It is not human

Making financial decisions can be challenging and overwhelming. Without the human face, a robo advisor cannot emotionally connect with its clients. It is unable to understand their drivers and fears

Unlike traditional financial advisors who can give you a myriad of tips (i.e., how to save up for real estate, how to secure life insurance), a robo advisor cannot offer words of advice regarding your elaborate goals and needs. While robo advisor companies have customer services to address your complex concerns, some people need a more personal financial advisor whom they can discuss their issues with.

5. It has limited customization options

Robo advisors are relatively new to the market, and their services might not be as varied as you would expect. If you have specific financial goals (i.e., you want to purchase individual stocks, you want to pick a certain mutual fund), robo advisors may be limiting for you.

On the other hand, traditional financial advisors provide a wide range of investment options for their clients. Because they have the edge of knowing you personally, they can create more creative ways to help you craft your most ideal portfolio.

Should you use robo advisors?

Robo advisors have a lot of advantages, especially if you are just starting out as an investor. But if you have the means and more complex financial needs, then you might want to hire a traditional financial advisor to manage your portfolio.

Then again, the good news is that you don’t necessarily have to choose between one or the other. Some companies provide options for you to have the guidance of both a human advisor and a robo advisor at the same time.

Which is the best robo advisor for you?

Which is the best robo advisor for you?

Ultimately, the best robo advisor for you depends on your personal investment goals and current situation. As for every financial decision, you will benefit from understanding your personal lifestyle needs before jumping into the bandwagon.

Most robo advisor platforms work great, especially for beginner investors with basic needs. But of course, features and fees vary for each platform; so, it will be best that you look into the ones you are most interested in and most suitable for you.

All in all, robo advisors prove to be a great choice for aspiring investors. Low-cost and convenient, the technology is paving the way for more people to have access to a high-quality investment portfolio.