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What is a Robo Advisor and Should I use One?

Does your Financial Investment Advisor (FIA) demand minimum asset requirements? If you’re tired of loaded investment products pushed at you by them, automated trading platforms could be the obvious choice. A robo advisor automates the way assets are allocated for making investments. To those seeking to know “What is a robo advisor”, the answer is simple. It is an automated advisor based on a computer algorithm. But those looking to understand if robo advisory investing is right for them, must consider many factors including net worth.

  • Robo advisors are the future of financial planning
  • From automated rebalancing to other routine transactions, they offer value for investors
  • Robo advisors offer low-cost investing options
  • Robo advisors are emerging as the perfect tools to help investors

Steve Miley

pro MEMBER SINCE 2018

Steve has 29 years of financial market experience including 3 years at Credit Suisse and 15 years at Merril Lynch. Steve is the Academic Dean for The London School of Wealth Management and has won many awards from Technical Analyst Magazine.

10 min read 27th of May, 2018
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Precision in Automation: Why Robo Advisors Rule

If expensive Wall Street advisors offer a raw deal and no real value, it’s time to opt for robo advisors. While no investment strategy is perfect, a robo advisor can cut through the jargon and get you results. Though some FIAs can add a lot of value, guidance for asset allocation needs to be based on numbers. This is something a computer program, it is argued, can do as well if not better. For those who value the human element, robo advisory services that are not 100% automated may be a better choice.

what is a robo advisor

Whether it is a comprehensive financial plan or tackling market meltdowns – whatever the investment advice needed – robo advisors can be as effective as their human counterparts. Technology can be used to provide account access in transparent ways across multiple devices, streamline operations and manage rebalancing or other routine transactions. Advisors delivering value will thrive. This includes robo advisory services.

Top 3 ETF Broker Comparison

1
of 6 ETF Broker IG
ETFs w/ discount 1200
Custody fee 0 GBP
Min. deposit £ 0
Trading from 5 GBP
Go to Broker

75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 6 ETF Broker AJ Bell Youinvest
ETFs w/ discount 0
Custody fee 0 GBP
Min. deposit £ 0.00
Trading from 1,50 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.

Humanising Robo Advisors

What is a robo advisor in a hybrid sense? These are essentially robo advisors with human support such as dedicated human advisors for basic financial planning. Dialogues revolving around robo advisors versus humans and digital versus traditional miss out on the modern markets. Here, investors want to profit from the best advisor, regardless of whether it is man or machine. Independent financial planners may also refer investments to a robo advisor. Online digital dashboards can be the medium to access accounts and incorporate portfolio data in such a case.

Automated trading matches clients to appropriate portfolios through online surveys. Robo advisors facilitate automated portfolio rebalancing and free up the FIA’s time to concentrate on non-routine trading transactions. But robo advisors offer a whole lot more too. Unfortunately, digital advisors are perceived with a great deal of trepidation and sometimes considered a high-risk proposition for investors.

Robo Advisors for the Millennial – Myths and Misconceptions

Robo advisors were once thought to appeal only to the millennials and young investors. But even those who are not tech-savvy, with larger balances can benefit from robo advisors.

Basic financial planning, portfolio management, and even tax-loss selling are some financial investment plans where the influx of robo advisors has brought about a sea change. Perhaps the biggest myth about robo advisors is that they are robots. In reality, these are simply automated computer algorithms that manage the online investment.

Also known as online wealth managers, digital wealth managers, and digital advisors, robo advisors can use technology to create a better client experience. Investors can communicate effectively and lower costs using robo advisors.

Another big misconception is that robo advisors are risky. These digital advisors are regulated and compliance is enforced. Security is something a robo advisor never compromises on. Advisors use bank-level security measures to ensure data is safely collected and stored. Encryption is also another strong point of trusting your money management to an algorithm. A study by AT Kearney even indicates robo advisors are the next step in the evolution of financial advice and asset management.

Digital Disruption and The Power of Robo Advisors

Robo advisors may be a new technology, but they offer established financial services, including a completely customised portfolio. Efficient, scalable technology ensures that portfolios are reviewed, monitored and regularly rebalanced. More so, it’s at a fraction of the cost the FIA would charge. These online wealth management tools can be used on any OS enabled web or mobile device. An innovative alternative to trading, robo advisors are safe and legitimate.

What is a robo advisor like in comparison to a human one? Well, these digital advisors can handle just about any type of financial planning. One of the most interesting features of robo advisors is the manual function. If you want a hands-on approach, online investing can co-exist with manual investing. This is why many seasoned and novice investors prefer a digital wealth advisor.

The advisors use special algorithms to operate more efficiently. Restricted to the area of portfolio management, and financial planning, robo advisors don’t generally handle cash flow management or estate planning. On account of robo advisors though, portfolio management is now available to a large network of potential advisors. Mass-market investing and low-cost trading have been born with the advances in technology and the advent of robo advisors.

How Do Robo Advisors Function?

How robo advisors work depends on the services you choose. But most robo advisors operate on the same principles, offering automated or manual approaches depending on your preferences. Starting small or having large amounts to invest can make a difference to the type of robo advisor services you use. Robo advisors also provide a wide range of portfolio management services. Alongside the initial asset allocation, automatic dividend reinvestment and tax loss harvesting are some other areas where robo advisors excel. Additionally, they charge less fees and some even offer free services, deducting fees after reaching a certain amount of investment.

Automated investing is charged through a monthly or periodic fee. A percentage of the investor’s account balance may also be taken as a fee.

The rise of the robo advisor can be pegged to a growing need for low cost and affordable investing and the expertise offered by skilled automated advisors. Additionally, even financial services providers are considering partnerships with robo advisors. But it is important to remember that machines working on algorithms can also have flaws.

Robo Advisors and Risks

All digital financial advisors cannot be seen as a magic bullet for investment requirements. Robo advisors differ across brokerages and use complicated algorithms to monitor investment. Yet, advisors cannot always choose the best algorithm that always works. Minimum deposits for some robo advisories is higher than FIA. Additionally, there are hidden costs and fees for ETFs robo advisors purchase on your behalf. Account type supported can also differ across IRA, joint and individual.

Only some advisory services are 100 percent automated, while others are human-assisted. Robo advisors are not personalised. As an investor, you may have goals, but you also may require money-related issues and concerns to be addressed. Financial planners can integrate taxes, finances and estate plans. On the other hand, robo advisors can only offer support for a narrow range of investments and asset classes.

No face-to-face interaction or human element can prove detrimental when it comes to investment that involves understanding your inner motivations. If you feel a machine cannot be trusted on account of technical failures, it would be wise not to invest in robo advisors. But if low cost investing is preferable, this form of investment advisory services could be worth a try.

Robo Advisors and Risks

What’s Rewarding About Robo Advisors?

Before the introduction of robo advisor platforms, low trading fees were not so common. And getting investment advice for free was unheard of. Many robo advisor algorithms rely on Nobel prize-winning investment theories. Investing through robo advisors is scientifically grounded in theory. From 1990 Nobel prize winner H. Markowitz to the 2013 winners, Fama and Shiller, cutting-edge research by skilled scientists has served a basis for driving digital financial advisory products.

Traditional financial planning institutions white label robo advisor platforms for clients, too. This takes the cumbersome task of asset choice into account. Low-fee robo advisors for different clients are not a one-size-fits-all solution.

Entrants into the trading landscape can also opt for robo advisors to handle their routine investments. Robo advisors are the future of the financial industry. Robo advisors are computers and these algorithm-generated ways of investing can make it easier to manage complex financial planning.

But most robo advisors are limited to specific investments as live workers can determine market conditions better, given the fluctuations and inconsistencies. If an online advisor is the right choice for you, the next question is what is a robo advisor working out to, in terms of value and how do you assess such a service?

How to Choose a Robo Advisor

The question of whether or not you choose a robo advisor depends on your area of investment, the complexity of the portfolio and investment motivations. But if you do decide to go with a robo advisor, you need to know that these vary in terms of expertise, compensation, and clients they work with, much like your FIA. Most robo advisors offer portfolio management and investment advice. But some also give investment recommendations.

Some robo advisors focus on specific areas like management of retirement accounts. Others are for customers with a high net worth. Most robo advisors charge fees between 0.15 to 0.5 percent of managed assets and also charge a one-time setup fee.

Along with this there are also expense ratios of ETF and MFs which can be levied as transaction costs. Institutions like Fidelity and Vanguard even have their own robo advisories to introduce more services to customers.

You also need to consider the nature of investments you make and whether a hybrid model tapping man and machine synergies would better serve you. Depending on the complexity of the transactions and financial planning, there can be a whole host of reasons why you may or may not choose a robo advisor.

1
of 29 Forex Broker HYCM
Currency pairs 69 Currencies
Max. Lever 1:500
Trading size Micro-Lot
Minimum deposit $ 100
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 Forex Broker ETFinance
Currency pairs Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 Forex Broker FBS
Currency pairs 37 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 1
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 Forex Broker ITRADER.com
Currency pairs 50 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 Forex Broker GMO Trading
Currency pairs 60 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 6 ETF Broker IG
ETFs w/ discount 1200
Custody fee 0 GBP
Min. deposit £ 0
Trading from 5 GBP
Go to Broker

75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 6 ETF Broker AJ Bell Youinvest
ETFs w/ discount 0
Custody fee 0 GBP
Min. deposit £ 0.00
Trading from 1,50 GBP
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 6 ETF Broker Bestinvest
ETFs w/ discount 216
Custody fee 0.4% annually
Min. deposit £ 500
Trading from 0 GBP
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 6 ETF Broker DEGIRO
ETFs w/ discount 740
Custody fee 0 GBP
Min. deposit £ 0
Trading from 1,75 GBP + 0,004%
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 10 Stock Broker eToro
National fees £0.00
Custody fee £0.00
Intl. fees £0.00
Dep. Protection £50.000
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 10 Stock Broker Interactive Investor
National fees £7.99
Custody fee £9.99 monthly
Intl. fees £7.99
Dep. Protection 50.000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 10 Stock Broker IG Stock
National fees £ 8,00
Custody fee £ 8,00
Intl. fees 10 EUR
Dep. Protection 50,000 GBP
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75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 10 Stock Broker Calamatta Cuschieri
National fees £ 7.50
Custody fee £ 0.00
Intl. fees £ 7.50
Dep. Protection 100.000€
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 10 Stock Broker Hargreaves Lansdown
National fees 11,95 £
Custody fee 0,00 £
Intl. fees 11,95 £
Dep. Protection 50.000 £
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 29 CFD Broker HYCM
FTSE spread 20 Points
Dep. Protection £ 50.000
Max. Lever 1:500
Min. deposit $ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 CFD Broker ETFinance
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit $/€/£ 0
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 CFD Broker XM
FTSE spread 1.0 Point
Dep. Protection £ 50.000
Max. Lever 1:30
Min. deposit $ 5
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 CFD Broker ITRADER
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit £ 250
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 CFD Broker GMO Trading
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit $ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 18 Crypto Broker eToro
Crypto currencies 10
Max. Lever 1:2
Min. deposit $ 200
BTC spread 1,50%
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 18 Crypto Broker ETFinance
Crypto currencies 5
Max. Lever 1:2
Min. deposit £ 250
BTC spread 1%
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 18 Crypto Broker IQ Option
Crypto currencies 15
Max. Lever 1:2
Min. deposit $ 10
BTC spread 6 percent
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 18 Crypto Broker ITRADER
Crypto currencies 33
Max. Lever 1:2
Min. deposit £ 250
BTC spread Floating
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 18 Crypto Broker GMO Trading
Crypto currencies 33
Max. Lever 1:2
Min. deposit $ 100
BTC spread varied
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 7 Social Trading Broker eToro
Underlying assets 866
Dep. Protection 50.000
Min. deposit £ 200
Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 7 Social Trading Broker ZuluTrade
Underlying assets 200
Dep. Protection
Min. deposit £ 0
Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 7 Social Trading Broker Ayondo
Underlying assets 90
Dep. Protection 1000000
Min. deposit £ 2000
Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 7 Social Trading Broker Tradeo
Underlying assets 122
Dep. Protection 20000
Min. deposit £ 250
Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 7 Social Trading Broker FXTM
Underlying assets 247
Dep. Protection 20000
Min. deposit £ 10
Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 9 Spread Betting Broker City Index
FTSE spread 1 Point
Dep. Protection 50000
Max. Lever 1:20
Min. deposit £ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 9 Spread Betting Broker FX Pro
FTSE spread 1.5 Points
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 100
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 9 Spread Betting Broker IG
FTSE spread 1 Point
Dep. Protection 50.000
Max. Lever 1:30
Min. deposit £ 0
Go to Broker

75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 9 Spread Betting Broker Core Spreads
FTSE spread 0.8 Points
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 10
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 9 Spread Betting Broker OANDA
FTSE spread 1 Point
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 0
Go to broker
Risk warning: Capital can be lost. Terms and conditions apply.

Conclusion:

Conclusion: Robo Advisors and Services They Provide

Investors should be careful about going in for automation if they feel their requirements can only be met by human advisors. No computer algorithm or amount of trading expertise can replace human experience. On the other hand, algorithms offer error-free investments, as opposed to the FIA. If you do decide to go for a robo advisor, you need to consider which digital financial advisor meets your needs best. Consider the specific services robo advisors offer, the nature of human interaction provided, the minimum investment needed and fees as well as expenses charged.

Nowadays, it’s not just investors, but financial service institutions that are also seeking to partner robo advisors. That in itself should be an indication that robo advisors are the future of financial planning in partnership with your FIA. A growing trend is to pair the human advisors with the computerised ones. The result is the best of both digital efficiency and human experience.

Robo Advisor Highlights