With stocks and investments going more rampant and more profitable, for those who are lucky, more and more are getting interested in the field. However, investing isn’t just throwing your money in stocks and watching it grow, it also poses risks and one wrong move can flush all your money down the drain. If you know what you’re doing, you can make loads of profit but if not, you might miss some opportunities and remain sitting like a duck waiting for something to happen. As such, some people consult financial advisors who help them grow their money and take them towards the direction of success. These days, robo-advisors are here to help.
With more people wanting to enter the investing field, it has become difficult to find financial advisors as they become busier and scarce. With recent AI technology, financial advice can now be attained without a human advisor and instead can be from robots or what people call robo-advisors. While of course, AI might not be perfect, but with this technology, there won’t be a limit on access to financial advisors.
What are Robo-Advisors?
Multiple robo-advisors are now made available, as they have gained popularity since their launch almost ten years ago. Because they don’t require in-depth market expertise and have minimal starting deposits, they have grown popular among new investors. Robo-advisors are a computerized platform that offers automated, algorithm-driven financial planning and investment services with minimal to no human oversight. They can automate difficult, time-consuming tasks like rebalancing and tax-loss harvesting for seasoned investors. Typically, robo-advisors would ask about your financial situation and how you want to proceed then use the data obtained from you in order to offer you advice and help you with investments1.
How Do They Work?
Based on the choices of the investors, robo-advisors build the best possible portfolios. The Modern Portfolio Theory, which emphasizes the allocation of funds to stocks that are not completely positively correlated, is typically the foundation upon which portfolios are built. The weights assigned by robo-advisors to risky and risk-free assets are typically determined depending on the objectives and risk tolerance of the investors. By altering the weights of risky and risk-free assets, robo-advisors keep track of and rebalance the portfolio when economic conditions change. Tax loss harvesting is a function that certain robo-advisors offer. When turned on, the robo-advisor might sell underperforming investments to “harvest” capital losses that are tax deductible, and then buy new investments to maintain the direction of your portfolio. The plan might help you save money this year and increase your long-term profits.
The Benefits of Robo-Advisors
Now that you’ve heard what robo-advisors are, they run a pretty good bargain and seem too good to be true. But like any other system, it has its pros and cons2.
Starting with the good stuff, robo-advisors are easy to get started with. With these, you only need to start with low or perhaps no minimums and answer the initial questionnaire. From there, your robo-advisor will guide you.
Compared to handling your own account, robo-advisors offer hands-off management as they automatically rebalance your portfolio. Robo-advisors also relatively have low management fees as compared to normal financial advisors. The algorithms used by robo-advisors are based on investment theory that won the Nobel Prize. Best practices investing theory generally aims to build an investment portfolio with the greatest return for the least amount of risk. Modern theories-informed cutting-edge investment portfolio research is used by some robo-advisors to guide the development of their solutions.
The Risks of Robo-Advisors
On to the drawbacks, one of the biggest cons is the limited access to human advisors. While having a robo-advisor is easier and more accessible, human opinions would still be beneficial. Some robo-advisors don’t provide human support for concerns concerning investments; instead, they solely provide it for tech and account-related issues. Using a robo-advisor may prevent you from selecting (or avoiding) certain investments. Some platforms limit fund selection and portfolio modifications.
While some platforms provide socially responsible choices, various people may have diverse definitions of what that means. Robo-advisors can make recommendations and manage accounts based on available information but lack a complete picture of assets. Linking all your financial accounts may not provide personalized guidance like an advisor familiar with your financial position.
Should you use them too?
For many investors, robo-advisors can be a terrific answer. They provide investing management at a fair price, freeing you up to do more of what you enjoy. All you need to do is fund the account; a robo-advisor sets up and monitors the investment plan. Whether or not robo-advisors would be for you is completely up to you.