Should you do all your investing yourself? Or should you pay someone to do it for you? Traditionally, these were the two options available to retail investors around the world. For the first option, the assumption is that you have the expertise, skills and (continuing) education to invest successfully for yourself. For the second, you need the financial means (and the commitment capacity) to pay and work with a human advisor.
But what if you have some expertise and knowledge, but not enough cash to pay for an advisor? Until just ten years ago, your only options would have been to develop your skills or save until you could afford an advisor. Not anymore.
In many markets, there is now a third option that falls somewhere between a portfolio driven by a do-it-yourself trading platform and a personalized wealth management team: it’s a robo-advisor.
Robo-advisors are digital platforms that use computer algorithms to build automated portfolios with a targeted level of risk. Most of them also offer investors digital investment advice, often at a fraction of the cost of a full-service financial advisor.
Robo-advisors start by asking you to complete a basic questionnaire aimed at understanding your investment goals, time horizon and risk tolerance. (You can see a sample risk tolerance quiz here – this one is a quiz developed by Morningstar for US-based investors.) Once you’ve completed the quiz, a robo-advisor will match your answers to an investment portfolio that best suits your needs. . The portfolios offered are generally made up of low-cost, passively managed funds.
How do robo-advisors work?
Robo-advisors have lower fees and low to no investment minimums, so you don’t need a lot of cash to start your investing journey with just one. You can open an account for as little as £5,000 or less. This means that even if you are a new investor or have a small balance, you may find it very attractive.
Digital advice is cheaper than what an actual advisor would charge. Morningstar surveyed more than a dozen robo-advisors and found that the median advisory fee was 0.30% of assets per year. A traditional financial advisor typically charges 1%. So if you have a portfolio of £500,000, you’ll pay £5,000 a year with a traditional advisor, while a robo-advisor will cost you £1,500 a year.
By the way, it is important to remember that the cost of these platforms depends on variables such as the type of services you choose and the amount of money you invest.
Robo-advisors typically steer younger clients or more aggressive investors toward portfolios richer in stocks or other volatile assets, and they recommend portfolios heavier in bonds or less volatile assets to older or more conservative investors. The level of personalized financial planning increases as one moves from digital advice to traditional advice.
Is a Robo-Advisor right for me?
Robo-advisors may be a good option for some investors, but they are not for everyone. Here are a few cases where a robo-advisor might not work for you:
- If you have a low risk profileyou are not in a position to invest in self-sufficiency and you are not particularly used to automated solutions and your objective is to preserve capital through a secure and transparent service, then a traditional business model and interaction with a human consultant will meet your needs.
- If you have a low to medium risk profile, your goal is to increase your capital in the long term, if you want to keep control of your investments, but despite everything, you do not feel completely safe to invest without the advice of an expert, then a robot -advanced advisor can be your choice. Many platforms have indeed attempted to bridge the gap between digital and human investment advice by incorporating real-time behavioral nudges via text or email to encourage users to stick to their investment plans. investment and to continue to take the necessary steps to achieve their goals.
- If you have a higher risk profile, you like to spend time managing your investments and you want to invest without outside advice, then you will not be satisfied with the traditional system and you would be very keen to adopt innovative management solutions like a robo-advisor. It’s very common among younger generations who have grown up with the internet and social media at their fingertips and prefer not to meet anyone in person. To meet the preferences of young, tech-savvy investors, some platforms have tailored their offerings to maximize technological capabilities and minimize human interaction.