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What are Robo-advisors?

Fernando Cortez


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Hi, thank you for your question! 

Robo-advisors are automated investment account managers, after they receive required input about the actions they should undertake, they operate solely with investors' account, adhering to the previously input commands. 

They help new traders manage their portfolios with advice, and by relieving them of monitoring their investment constantly. These advisors are an alternative to the traditional advisors which are usually more expensive. 

Robo-advisors set themselves up through a questionnaire which the user fills out, these questions are usually related to the capacity of users’ investment, their risk tolerance, and other investment-related questions. 

After this, they build a portfolio according to the algorithm and start maintaining it in order to fulfill a target set by the investor. There are many pros and cons to this option for investing. The pros are:
It doesn’t require previous knowledge, which is excellent for new investors, as it saves them from making risky and unprofitable decisions and investments.
They are not time-consuming, which means that investors can put their account on automatic and reap benefits without constantly monitoring it and making adjustments.
Using simple strategies means that they opt-out for the strategies in investing which are previously tested and have returned positive results, rendering the risk involved to a minimum.

The cons of Robo advisors are:
No human to human interaction, this means that even though they are cheaper and easier to use, when they encounter a problem that is more complex, they fall short. And there is no human-like interaction which would guide you step by step through your problem.
They limit investment options, even if an investor wants to invest in a stock which he/she deems fruitful and opportunistic, Robo-advisors may opt-out against it as it doesn’t fit their previously set parameters.
Need for multiple accounts, in order to successfully manage a few portfolios it is necessary to open more Robo-advised accounts, which may prove more complex and more expensive.

In conclusion, they are a great start-up tool that will certainly help new investors to grasp how trading works and protect them from investments that could end their investing careers. In a longer time frame, diversification may prove necessary.

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