Robo Advisors - The Future or a Flop?
- September 14, 2021
- by Michael
Robo-advisors are a new technology powered way to handle wealth management. They often consolidate all of your investment management, tax harvesting, and retirement planning requirements in the most efficient way possible.
We have analyzed the different attributes of Robo-advising, its pros and cons, its impact on the future, and the likely hybrid model that will become standard in the years to come.
How Do Robo-Advisors Work?
Algorithms form the core of the functioning of Robo-advisors. They thoroughly analyze the existing financial credentials of a user, which include their cash flow and assets. Additionally your expectations for your rate of return, appetite for risk, the nature of the employment, and available time horizon are taken into account. The software crunches all your data and presents you with a recommended portfolio.
Different Applications Of Robo-Advisors
Robo-advisors possess a multitude of applications, all of which are centered around wealth management in general.
This attribute is the most common utilization domain of Robo-advisors in the management of the finances of users. The Modern Portfolio Theory is the base structure, and it allocates your money to assets that lack a positive correlation (in other words it adds diversification to the portfolio).
Maintaining capital and protecting the security of retirement assets is an essential requisite in today’s day and age. Since top-tier investment companies own most of the Robo-advisors, you can be assured of protecting your assets from security breaches.
As a tax year draws to a close, investors generally sell their securities at a loss to ensure that they save on the capital gains tax. The role of Robo-advisors at this juncture is to automate tax loss harvesting and re-investment in similar securities (but different enough not to trigger a wash sale).
List of Robo Advisors (some are Quasi-Robo Advisors):
This list is in no particular order and put here for reference only. Before opening an account do your own research.
Impact On Future Of Advisories
In the future, Robo-advisories will enjoy diversified scope due to the progress in multiple fields such as machine learning, sophisticated analytics, artificial intelligence, and language processing.
For right now a Robo-advisor is basically like having a regular brokerage account with a few extra bells and whistles built into their offering. For example the idea of automatic tax loss harvesting might boost your short term returns a bit, and while you could try to work that out yourself, buying into a platform that does it for you can be attractive.
If you still want someone to talk to on a regular basis, or feel like you need a lot of guidance and assistance with investing, an in the flesh advisor is going to be much better for you. Although their fees will be higher, there is no substitute for human interaction. Robo advisors and traditional over the phone or in person advisors will likely begin to team up in the future, offering the best of each approach.
Benefits Of Robo-Advisors
The pros of Robo-advisors are indeed plenty. Let us look at some of them in an in-depth manner.
Increased Market Access
Since Robo-advisors primarily target ordinary investors, it helps them gain entry into the premium section of the market without major difficulties. Investors can reap better returns or lower fees vs the plans suggested by human advisors.
Low-Cost and no Minimums
The services of Robo-advisors cost significantly less than human advisors. Since the entire process is automated, the inculcation of optimized strategies is also available at affordable prices. There are no minimum balance prerequisites with many programs so it is easy for anyone to get started.
Better Accuracy And Fraud Protection
With the introduction of Robo-advisors to monitor your assets, fraud detection becomes simpler and gives you more protection. Manual inputs are entirely removed from the equation, thereby reducing the incurrence of errors.
Disadvantages Of Robo-Advisors
The benefits of Robo-advisors are note-worthy as automation comes with its share of disadvantages as well. Some of the problematic areas are presented below.
Lack Of Physical Association
Many investors prefer to have face-to-face contact and detailed, personal discussions with their financial advisors. However, Robo-advisors do not provide you with this facility as the entire process is digitalized and leaves you with no scope for direct interactions. The robo advisor doesn’t know you, it is really just a glorified app that has been programmed to present you options based on the limited profile it has on you.
Complex Planning Unfeasible
Despite the advancement in digitalization and technology, Robo-advisors do lack in the realm of complex financial planning.
When you want to integrate different aspects of your finance schemes like insurance, budgeting, savings, real estate and tax, Robo-advisors will require the intervention of a professional to take this step further. In other words, Robo advisors are setup to sell what they offer, but not much else. If you don’t fit into their preconceived mold, a Robo-advisor isn’t a good fit for you.
Limited Track Record
Unlike human advisors who have been in this field for a substantial period, Robo-advisors are comparatively new and have a restricted track record. This aspect makes it difficult for us to perform a reasonable comparative study between the features of both models. The tax loss harvesting scheme may not pan out in years to come as it is possibly going into a grey area or exploiting a loophole that could be closed.
Lack of Transparency
When software systems make decisions, they do it based on the business logic coded into them by the people who designed and engineered it. There could be a major mistake lurking in there that would cost you money. There could also be unethical ideas baked into the system that allow the Robot-advisor to exploit its customers en-mass. As an end user of the system you don’t have access to the code and can’t see behind the curtain. In fact, you are the product in some senses.
Hybrid Model Of Human And Robo Advisors
The ideal solution to enjoy the exclusive benefits of both the potential advisors and cushion your investments safely is to opt for a hybrid model. Millennials have increased the popularity and usage of Robo-advisors. However, there is a long way ahead.
A hybrid model that combines the best features of traditional human advisors and contemporary Robo-advisors provides the best results. This model is made possible when a human advisor provides insight to the investor based on digital computation.
The union of a personalized human advisor and an algorithm-based Robo-advisor will work in tandem and resolve most impending issues! Hybrid models increase the overall reliability factor while eliminating the issues of miscalculation and inaccuracies.
Summing It Up
Robo-advisors are here to stay, and they have made their mark in the domains of investment and financial planning. Therefore, you can opt for this approach to meet your requirements of algorithm-related budgeting and organization.
You can also consider the hybrid model where human advisors and Robo-advisors engage as a united front to offer you the best possible revenue. The streamlining of all of your investment decisions is now made easier than ever!