Most people don’t know what to do with their money when it comes to investing or planning their finances. Not every person has knowledge of financial markets and this is where financial advisors come into the picture. However, there is a new kid on the block or are giving these financial advisors a run for their money. We’re talking about the Robo-advisor.
What Is A Robo-Advisor And How Does It Work?
The Robo-advisor is a new class of financial advisors. As the name suggests, robots provide professional financial advisors to clients with minimal human interference. Robo-advisory services have been present for a long time now. The first such service was started in the year 2008. As of 2017, Robo-advisor almost has $224 billion assets under management worldwide.
So, how does Robo-advisor work?
The robots provide financial decisions based on algorithms that have been programmed in them. These algorithms determine your portfolio and investment decisions during the long and short term investment strategy.
How Does A Robo-Advisor Differ From A Traditional Financial Advisor?
There are some key factors to differentiate between the two services. This will help you make the decision on which option is better for you. Here are some differentiating factors between the two:
Robo-advisor is best suited for any passive investor who just invests his money and forgets it. The robotic algorithm determines your portfolio and makes changes to your portfolio accordingly. That is the scope of Robo-advisor.
Financial advisors, on the other hand, apart from handling your portfolio can handle other aspects of your finances as well. They can look after your other investments, day to day finances and estate planning. They can help you prepare for contingencies during dire times.
This is one area where there is a big difference in cost. Robo-advisor charges somewhere between 0.25%- 0.50% of the total assets under management during the year. On the other hand, financial advisors charge you 1% to 2% of the assets under management. Some financial advisors also have the option of charging a flat fee which could range between $1000 and $2000.
Minimum assets under management
Robo-advisor requires minimum assets under management of 500$ in the U.S. In the U.K, Robo-advisor services start from 1 pound assets under management. Traditional financial planners on an average seek to have a minimum assets under management of $50000. So, if you are someone looking to invest a small amount, Robo-advisor can be a good option which can even save you on commissions.
This is where Robo-advisor has a huge drawback. There is no personal connection. A financial advisor is someone whom you can meet face to face and discuss about your money. It instils more confidence in the client. After all, it’s your hard earned money and you need the assurance.
Would You Try the Robo-Advisor?
As more and more people get into investing, Robo-advisor can be of great use for them. For countries with low income people where assets under management are low, it can be a great option for them. This will help to cut down commissions also. With time, you can expect the algorithms also to become better which can help you get higher returns. Right now, Robo-advisor is available mostly in developed countries and the adoption of this technology is already on the rise.