What is a ‘Robo-Advisor (Robo-Adviser)’
Robo-advisors (robo-advisers) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets.
Breaking down ‘Robo-Advisor (Robo-Adviser)’
The first robo-advisor, Betterment, launched in 2008, the year of the Great Recession. Their initial purpose was to rebalance assets within target-date funds as a way for investors to manage passive, buy-and-hold investments through a simple online interface. The technology itself was nothing new. Human wealth managers have been using automated portfolio allocation software since the early 2000s. But until 2008, they were the only ones who could buy the technology, so clients had to employ a financial advisor to benefit from the innovation.
The advent of modern robo-advisors has completely changed that narrative by delivering the service straight to consumers. After a decade of development, robo-advisors are now capable of handling much more sophisticated tasks, such as tax-loss harvesting, investment selection and retirement planning. The industry has experienced explosive growth as a result; client assets managed by robo-advisors hit $60 billion at year-end 2015, and is projected to reach $2 trillion by 2020.
Other common designations for robo-advisors include “automated investment advisor,” “automated investment management” and “digital advice platforms.” They are all referring to the same consumer shift towards using fintech (financial technology) applications for investment management.
Benefits of Using A ‘Robo-Advisor’
The main advantage of robo-advisors is that they are low-cost alternatives to traditional advisors. By eliminating human labor, online platforms can offer the same services at a fraction of the cost. Most robo-advisors charge an annual flat fee of 0.2% to 0.5% of a client’s total account balance. That compares with the typical rate of 1% to 2% charged by a human financial planner, and potentially more for commission-based accounts.
Robo-advisors are also more accessible. They are available 24/7 as long as the user has an Internet connection. Furthermore, it takes significantly less capital to get started, as the minimum assets required to register for an account are typically in the hundreds to thousands ($5,000 is a standard baseline). One of the most popular robo-advisors, Betterment, has no account minimum at all.
In contrast, human advisors do not normally take on clients with less than $100,000 in investable assets, especially those who are established in the field. They prefer high-net-worth individuals who need a variety of wealth management services and can afford to pay for them.
Efficiency is another significant advantage these online platforms have. For instance, before robo-advisors, if a client wanted to execute a trade, he/she would have to call or physically meet a financial advisor, explain…