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What Are The Robo-Advisors And How Do They Work?

Jun 18, 2023

Robo advisor - What Are The Robo-Advisors And How Do They Work?

Grow your weath

Investing money is a great opportunity to grow your wealth, and there are many investment opportunities to look up. However, it is complicated for many people to oversee all these sums of money and start building their investment portfolios. That’s why they often need financial advice and hire human or automated financial advisors. Automated investing services or investment digital platforms are called robo-advisors (also spelled as roboadvisors) and don’t offer human advice at all.

One of the big advantages of using robo-advisors is their low cost for the traders: they charge management fees of a certain percentage of the total client’s assets, and they are usually lower than the consult of human financial advisors. The next advantage is, you can use the robo-advisors any time of the day you want just as online casinos with casino VIP rewards or digital betting platforms.

Not all investors (especially beginners and, therefore, those who combine their main activity with an attempt to make money on investments) have enough free time to study the nuances of investing. Most people by nature and disposition are passive investors: they have neither time nor desire to go into details of financial markets - they just want to receive their income, and preferably a larger amount! The main mission of such a robo-adviser is to help those who want to make money on investments get a real income without going deep into the subject of investing. That is, robo-advisers perform automatic trading with minimal involvement of the person they "serve". The first robo-advisors began appearing in 2001. Today Wealthfront and Betterment belong to the most popular automated investing services.

How do the robo-advisors work

The algorithm takes into account various parameters of the investor, his goals, his risk tolerance, the investment horizon, the amount of capital, return expectations, and others: the user must answer certain questions using the online survey made by the investment digital platform. The robo-advisor collects the data and determines his financial objectives and investment portfolio. His algorithmic services are based on Modern Portfolio Theory and provide financial planning and investment services. The Modern Portfolio Theory is focused on investing in broad-based and low-cost index funds (for example, ETFs).

Based on the data obtained, the computer algorithm itself selects a suitable distribution of assets in the portfolio, and financial instruments, and makes calculations of the assumed risk and profitability of the portfolio. As a result, the client receives a set of financial instruments and their proportions (investment portfolio), which in the opinion of the computer advisor is best suited for the client. In one case, the portfolio is broadly diversified and consists of funds that already include many securities. And the other advisor recommends a portfolio with only 4-5 securities, which is not enough for a diversified portfolio.

To use the robo-advisor you just need to sign up from your smartphone or computer at the digital investment platform and choose the account type (the taxable one or not). Then you need to complete the questionnaire about your financial goals and risk tolerance.

Getting started investing with a robo advisor is designed to be easy. Most allow you to sign up from your computer or phone in a matter of minutes. While all robo advisors work a little bit differently, here are the basic steps you will go through to get started. You get easy access to the platform and can save your efforts and time in research funds. And you can easily use this practical investment tool even with a lack of financial literacy, inexperience, and lower investment amount. The robo-adviser also allows you to build an investment portfolio in just a few minutes. In the case of working with a financial advisor, the portfolio can take several days to compile.

However, all robo-advisers have serious limitations because their work is based on a computer algorithm from which the program cannot deviate. The program takes into account only a small list of the client's basic parameters (risk level, age, goals, etc.) by which the robot selects an appropriate portfolio from a pre-prepared set of portfolios. Therefore, different people answering the same questionnaire will receive the same portfolio. The account holder isn’t also able to choose which funds to invest in: the automated investment advisors do it for him. Therefore, robo-advisors give people the opportunity to get started with investing easily, but if you are looking for “advanced” and complicated investing decisions, you should look for a stockbroker and human interaction.

See:  An investor’s guide to robo-advisors

While automated investment advisors have some disadvantages to consider, they are effective and low-cost tools for investment management. They focus only on passive investment strategies and won't beat the market, they are an excellent option for many people who want to invest.

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