In 2020 we are all getting used to receiving some form of help from artificial intelligence (AI) in our day-to-day lives. Whether it be our mobile phone provider, high street bank, utility company, or online store. Some can be helpful whilst others can totally ruin your day by sending you round and round in circles and not getting the answers that you need. This kind of frustration can send stress levels skyrocketing and leave you feeling like literally tearing your hair out!
But I am glad to say that things are improving every day, as technology becomes more and more advanced and a great example of this is the robo-advisor. So what exactly is a robo-advisor and are they right for you?
The origins of robo-advisors were born back in 2006 when Mint.com (now owned by Intuit Inc) developed a semi-automated personal investment management system that allowed customers to manage all of their banking needs in one place.
Two years later after the financial crash of 2008, more enhanced versions started to emerge aimed at offering the general public easy access to professional financial investment and management.
In 2010, Betterment launched its automated low-cost investment management robo-advisor, which went on to be the largest at that time with its total AUM (assets under management) reaching $22 billion in March 2020.
So what exactly are they? Robo-advisors have been developed by using sophisticated computer algorithms providing them the ability to manage and build investment portfolios automatically. By being able to directly invest in funds without the necessity of human intervention, it effectively cuts out the work of the middle man, thereby making huge savings for the institutions that use them.
Although there are huge benefits to using robo-advisors, it is not always suitable for everyone. Here are some benefits and downsides to this artificial intervention:
Benefits:
First and foremost has to be cost. This method of managing a portfolio carries far lower fees than paying a human for their time and expertise. For example, a robo-advisor fee can be a fraction of a traditional investment management fee.
Ease of use is another huge benefit. Instead of having to spend time discussing your requirements with a traditional investment manager, using a robo-advisor is more convenient as it requires only a questionnaire to ascertain your income, desired level of risk, and growth.
Robo-advisors make it easy for novices to invest. You can just leave your money in the hands of this clever little bot and do nothing further. This is a big plus for people who may find the whole personal investment market rather daunting.
This form of portfolio tends to carry far lower minimum investment amounts with Wealthfront's minimum being $500 and Betterment's sitting pretty at $0.
Robo-advisors get the job done without experiencing emotions so it eliminates the chance of making a risky gamble. They stick to the program, managing your money efficiently and safely without behavioral bias.
Automated tax-loss harvesting is another great example of the benefits of using a robo-advisor. Tax-loss harvesting is when you sell assets that have lost value to offset the gains on other investments. Being a complicated process, a robo-advisor would be a lot more efficient and accurate than a human could.
Downsides
Lack of true personalization. Despite being able to set and refresh your investment goals using financial planning software, you can't choose your investments. For a lot of people, this is fine, but for others who like to have a bit more say, it's probably not the best option although these strategies are being improved continuously.
Some people really do prefer that little bit of hand-holding and human reassurance when it comes to handing over their hard-earned money. So for some, a personal relationship is as important as the investment itself - especially when there may be big shifts in the markets such as financial crises.
When deciding which robo-advisor to go with, you need to check out what it can do for you, the fees charged, minimum investment amount, and of course reputation. Checking out reviews of the new kids on the block such as this great M1 Finance review will keep you abreast of the latest offerings in this field.
So whilst, like everything else in this world, robo-advisors have their pros and cons, technology is constantly improving. It therefore probably won't be long until we are all using this highly innovative and convenient method of investing.
