Robo-advisors are automated platforms that use machine learning algorithms and data analytics to deliver the best advice on the most profitable investment opportunities in the market. Each robo-advisor platform is unique in its own way, but they all serve the same purpose according to your balance. You also get to have full control of your investments with minimal human intervention.
According to Wealthadviser, the Robo-Advisory market continued to grow despite the outbreak of the coronavirus. The global market size of robo-advisors is valued to reach approximately $1 Trillion in 2020 growing by 40% year-over-year, with an anticipation of reaching $1.5 Trillion by 2023.
To use a robo-advisor you simply have to create a profile, answer a set of comprehensive questions that set your profile standards by defining your goal, your ideal retirement age, and your sensitivity to risk. Based on your answers a curated profile is created to your needs and preferences. Once you have funded your account, the robo-advisor will regularly check and evaluate investment opportunities that will help you achieve your set goal.
So, what are the pros and cons of robo-advisors?
Pros:
- Inexpensive. You do not need a very big balance to use robo-advisors.
- Reduced charges. Robo-advisors require little to no human interaction. Therefore, annual rates are reduced.
- Accessible. Roboo-advisors are available 24/7 making it easier for investors to check on their investments anytime.
Cons:
- Limited options. As an individual investor, robo-advisors limit our options of investments.
- Lack of profile personalization. Goals and profile personalization are limited to what is offered by robo-advisors.
- Lack of human element. The algorithms may suggest reasonable opportunities, but a human financial advisor can always discuss and reassure investors when making major decisions.
Are robo-advisors replacing financial advisors?
Robo-advisors have gained a lot of interest recently. Some might even think that they are threatening the careers of human financial advisors. First, they charge a lot less than financial advisors. The annual fees can be as little as 0.25% to 0.5% of the account balance. Second, based on the profile goals and investment plans the algorithms calculate and select suitable investment opportunities, maintaining how much the user is exposed to risk. Moreover, the process of systematic investing and low fees makes robo-advisors attractive to newer generations, especially Millennials.
On the other hand, anyone can hire a financial advisor based on their income and goals. Typically, hiring a percentage based financial advisor costs around 1%-2% per year on managed assets. They are also driven by the growth of investments. The more you invest, the more money they make from their percentage. Of course, you can also hire short-term financial advisors that only require an upfront payment, but come with a slightly higher risk of being bias-driven and extremely persuasive.
Undoubtedly, robo-advisors offer an appealing array of automated investment options and services. But, financial advisors can hold a stronger power over machine learning services as they are constantly available, offer individualized advice, suggest better short-term and long-term plans, and coach the investment journey of their clients.
However, you can now make the best of both worlds by hiring advisors that use robo-advisors- as-a-service to maintain and track your investments with a human-touch that will advise better decisions based on your goals.
Here are the best robo-advisors of October 2020*
|
Name |
Best for | Account minimum $ | Management Fees $ |
|
Betterment |
Beginners | $0 |
0.2% to 0.4% |
|
Wealthfront |
Low fees | $500 |
0% |
|
Ellevest |
Goal-based investors | $0 |
0.2% to 0.5% |
|
SoFi |
Multiple goals | $1 |
0% |
| Charles Schwab Intelligent Portfolios |
Ease of use |
$5000 |
0% |
Key Takeaways
- Robo-advisors are automated platforms that collect data to provide reasonable investment opportunities.
- Robo-advisors base decisions on your profile goals and sensitivity to risk.
- Robo-advisors allow you to invest at lower fees and minimum amounts.
Shahenda Ibrahim
Researcher at Investera
Resources: https://www.investopedia.com/robo-advisor-vs-financial-advisor-4775377
https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Deloitte-Robo-safe.pdf
*https://www.cnet.com/personal-finance/best-robo-advisor-of-2020/
https://www.bankrate.com/investing/best-robo-advisers/
https://www.wealthadviser.co/2020/05/18/285696/us-robo-advisory-industry-hit-usd1tn-value-year