What are robo-advisors and how do they work?

Robo-advisors appeared on the scene after the great recession of 2008. They’re not actually robots but software, providing automated and algorithm-based financial advice. Intelligent minds program these algorithms to provide efficient financial planning at low costs. Today, many Robo-advisors operate independently without or with limited human supervision.

Humans can communicate with these Robo-advisors through smartphone apps or over the web. They collect information from the clients, for example, their financial situation and goals, etc. Then, by utilizing that data, they offer financial advice and invest on behalf of the client.

How to identify good Robo-advisors:

Well known Robo-advisors have a user-friendly interface with clear and easy steps for setting up an account. They provide comprehensive future planning along with portfolio management and ensuring security. In addition, they offer services at affordable prices and educate their clients.

Advantages of Robo-advisors:

There was a time when only a particular group could avail the services of a financial advisor because they were expensive. Now, everyone can buy those services at an affordable price. A typical Robo-advisor’s fee ranges from 0.25% to 0.5% of your portfolio value. On the other hand, a traditional investment advisor would cost you about 1% of your assets under management. Robo-advisors are extremely efficient yet inexpensive.
They’re also more accessible because they require comparatively low capital to register an account. For example, Robo-advisors like Unhedged let you start with as low as $100. This makes investing effortless and attractive.

Contrary to Robo-advisors, human advisors tend to take clients with more investable assets. Usually, they don’t take clients with less than $100,000 worth of investable assets. Because affluent clients will need their services more often and will pay them huge sums of money in terms of fees or transactions etc.
Previously, before making any financial decision, you would need to call or schedule a meeting with your advisor at a particular time and place. But, Robo-advisors allow you to invest your assets as you please at any given time with a few clicks from your comfort zone.

Sometimes, the services of Robo-advisors and human professional financial advisors are offered combined. Because Robo-advisors are cost-effective while human professionals can make sophisticated and complicated decisions on behalf of the client that a digital platform (Robo-advisor) can’t perform.

Robo-advisors aren’t all sunshine and rainbows:

We have stated many benefits of Robo-advisors but, they also have some downsides. After several years of development, they still need improvement to match the intelligence level of a human financial advisor. According to a survey, these digital platforms managed assets worth over 1 trillion US dollars worldwide and $3.44 billion worth of Australian assets in 2020. However, they can’t make complex decisions regarding investments like humans yet.

That being said, you’ve to decide for yourself whether a Robo-advisor is enough to manage your assets or you need a human advisor. If you’re a beginner and just starting out, a Robo-advisor will do the job just fine. But if you’re into real estate or anything that requires sophisticated and complex decision-making, then you need a traditional financial advisor to do robust planning for your future goals and turn your dreams into reality.