What are robo-advisors?
Gain insights into the reliability of robo-advisors and the benefits of human advisors in this comprehensive article.
What are robo-advisors?
Robo-advisors are digital platforms that can offer financial advice to clients.
Using technology, machine learning, and algorithms, these advisors can help you make financial decisions in just a few clicks.
If you’re looking to make investments, robo-advisors can also do that. They can recommend and automatically make investments on your behalf, using data analysis to explain their reasoning and how they can help you achieve your goals.
In short, robo-advisors can help you make important financial decisions – often for a cheaper fee.
However, it’s worth noting robo-advisors do not offer the human interaction and comfort that comes with making big financial decisions. Instead, they provide a good low-cost option, especially when you only want or need investment management rather than comprehensive financial planning.
How do robo-advisors work?
While relatively new, there are many different robo-advisors available.
When comparing your options, you should pay close attention to the fees associated with opening an account and any management fees in the future.
Usually, the first interaction you will have with a robo-advisor is a survey. You’ll likely need to fill in a number of details about yourself, your financial circumstances, and your future goals. Based on your responses, a robo-advisor can recommend some investment options. If you’re happy and agree with the recommendations, they can make investments on your behalf.
Most robo-advisors won’t let you pick individual funds to invest in, and you also likely won’t be able to choose which investment classes to invest in either – robo-advisors tend to make these decisions themselves. If you want to tailor your investments, speaking to a financial advisor is wise.
How do robo-advisors manage investments?
The main tool that helps robo-advisors make investment decisions is data.
Specifically, data relating to various investing theories, such as Modern Portfolio Theory (MPT), which involves investing for appropriate returns while balancing levels of risk. Although relying on data may sound risky, robo-advisors tend to favor passive investment strategies. This means they will look to keep your returns in line with the market average instead of looking to create profits above the rest of the market.
To do this, robo-advisors usually invest based on the indices of key investment funds and assets, meaning that whatever returns are generated for you will always be in line with other passive investment levels. So, in other words, robo-investors make decisions based on keeping your risks moderate while keeping your returns in line with what you could expect elsewhere.
This also means that if the market enters a period of underperformance, robo-advisors may be unable to prevent this from impacting your returns.
Robo-advisors v human advisors: which is right for me?
Whether or not you’d be better with a robo- or human advisor comes down to your own preferences and circumstances. For instance, you could be better suited to a robo-advisor if you have limited investment experience and only require investment management or simply want to go down the low-cost route.
However, when it comes to complex investment decisions and financial planning, there’s a lot to be said for one-to-one human contact.
Face-to-face relationships build trust and understanding and can help advisors truly understand your needs. They take the time to understand your circumstances and work with you to create a plan to reach your financial goals. With a robo-advisor, you don’t get any of this. For those looking for financial advice in areas beyond investing, it’s just one of the reasons why these robo-advisors aren’t always suited.
Robo-advisors also can’t deal with the uncertainty and complexity that sometimes affects people’s lives. If you find yourself between jobs or facing unexpected financial circumstances, you may need to change your investing strategy significantly or even completely withdraw your funds. A financial advisor can guide you through this process and help you make confident financial decisions.
You're more likely to need a human advisor for other financial services like estate and retirement planning. This is also the case if you are looking to invest a larger sum of money and looking for specifically tailored guidance that can change based on your needs.
Robo-advisors can help with certain financial decisions. But from investing to retirement planning and managing your estate, the right real-life financial advisor can be invaluable, giving you tailored guidance whenever you need it.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.