Even the best of us could do with some advice when it comes to financial planning. Traditionally, consumers approached financial advisors and wealth managers to sort their financial matters and develop a plan unique to their needs. But with the advent of technology, a large part of financial planning has moved to digital platforms with carefully crafted algorithms taking the place of traditional wealth advisors.
An example of digitalization replacing investment managers comes in the form of robo-advisors. Robo-advisors are relatively new investment tools provided by brokerages to create largely – if not wholly– automated solutions to your investment needs.
What are robo advisors?
The idea behind robo-advisors is to provide financial services with minimal human intervention. Most robo-advisors follow the same template – they collect information from investors through questions or other tools to assess their economic standing and financial goals. This data is used to then create an investment plan using complex algorithms. Some robo-advising services make investments on behalf of their clients.
A well-rounded robo-advising service assists the user from the conception to the execution of a financial plan. This includes easy sign-up of the account, goal identification, investment selection and investment portfolio management.
A glance at robo advisors
The first robo-advisor can be traced back to the American financial advisory company Betterment. Introduced in 2008, the company’s robo-advisor was aimed at managing buy-and-hold investments using an easy-to-navigate online interface.
Since 2008, the robo-advisor market has seen tremendous growth, recording a market size of $987 billion in 2020. The global robo-advisor market is expected to touch $2.9 trillion by 2025.
The first step in engaging a robo-advising service platform is creating an account on the platform concerned. The requirements may vary depending on the platform. In most cases, you will need details such as your bank number, know-your-client (KYC) details and Permanent Account Number (PAN) to do so.
Benefits of robo advisors
Robo-advisors are growing popular due to the ease of business they offer users. While the main objective of robo-advising services is to provide financial advice and investment portfolio management, they also offer better security, detailed analysis of one’s financial status and comprehensive customer service.
Increased accessibility: Robo-advising services are available 24/7, and all you need is an internet connection to enrol. Robo-advisors are also far more efficient and save time by offering various solutions at the click of a button.
Free of bias: Robo-advisors provide services free from bias. With minimal human intervention, investors are provided suggestions without emotional conflicts. Now, you don’t have to worry if you have been advised to invest because the advisor gets a commission.
Diversification: Robo-advisors offer better assistance in diversifying investments and assets than individual financial advisors as the scope of expertise is larger. This, in turn, gives investors the advantage of better returns at lower risks.
Low cost: In most cases, when you engage a financial advisor, you pay at least 1-2% of the wealth being managed in addition to hidden commission-based fees if any. Robo-advisors only have nominal fees making them more cost-effective. Even as a company, the capital and overheads for robo-advising services are far lesser than traditional services.
Security: Robo-advising services offer better security than traditional financial services, as investments are constantly monitored. Unusual activity can be flagged immediately, thereby mitigating financial fraud.
The advent of robo-advisors removed the need for intermediaries such as wealth managers. While one may argue that having a human touch to financial advice has benefits, robo-advising services are gaining popularity among investors due to their efficiency. In addition to providing users with a hassle-free experience, robo-advising services offer better security, lower charges and better diversification of assets.