There is a lot of hype about robo-investing; that is to say, handing control of your savings over to a robo-advisor, who will then invest it on your behalf. On the surface, it does sound a little crazy. Why would you relinquish control of your cash in the first place, and why to a robo-machine? We intend to get behind the hype and give you the low-down, the pros and cons of robo-investing.
Robo-investing doesn’t have anything to do with robots of course. It’s just a fancy name to grab your imagination. What it really is, is a set of specially created algorithms that financial advisors use to suggest what stocks and shares etc. would make for a good investment portfolio.
It’s all in the algorithms
If you’re an internal-savvy person, you will have no doubt heard about algorithms in conjunction with Google. They use them to police online activity and grade websites. Robo investors use similar algorithms, but created for the express purpose of spotting good investment opportunities.
Robo-advisors first appeared on the scene back in 2008. Yes, that’s right – the year of the global financial meltdown. They were originally algorithms that were conceived in order to realign invested assets in target-date funds, to allow investors to have a new, online platform.
Before 2008, this type of software, or set of algorithms, was only available to financial advisors who used it to manage their investments. During 2008 however, these robo-algorithms became available for use directly by the individual investor through robo-advisors.
Today, it is businesses the likes of Black Diamond, Envestnet, and Orion, who make this software specifically for IFAs. Each IFA has its own specific concoction of algorithms.
The cons of using a traditional robo-advisor
A traditional robo-advisor is one which only offers a robo interface to its clients. Everything is fully automated, and there are plenty of reasons why many people are nervous about trusting in this sort of investment.
- Your investment portfolio, once created cannot be changed
- There is absolutely no human interface
- After your application is complete, you have no influence on anything
- You are no more than another name on a traditional robo-advisors client list
The whole concept of working with a traditional robo-advisor comes from the angle that you do not want any contact with your advisor and that you don’t want to get involved in any way with the performance of your investment. If this is you, then a traditional robo-advisor works fine.
The pros of using a traditional robo-advisor
- You don’t have to make difficult decisions to do with your investment
- You won’t be plagued by annoying telephone calls or emails
- You can nominate your appetite for risk, and your portfolio will be built accordingly
- You have a low-value portfolio – there is no minimum investment amount
- You can set up a robo-investment account online in minutes
- No, or low management fees
If you are prepared to pass all control of your investment across to someone else (in this case a set of algorithms), a traditional robo advisor will suit you well.
Hybrid Robo-advisors
The fact that traditional robo-advisors give you no access to decision making, and offer you no contact, even if the value of your investment slumps or underperforms, puts a lot of potential investors off. Because of the amount of this lost revenue, Hybrid Robo-advisors have come into being. These are basically robo-advisors who also employ human, financial specialists to keep an eye on portfolios, and if necessary intervene. This can also include talking to investors.
In addition to the periodic rebalancing of portfolios to restore the percentages of a portfolio’s initial asset allocation, many top robo-advisors like Betterment LLC and Schwab Intelligent Portfolios offer other services too.
Betterment LLC
For example, Betterment LLC advertises that anyone who opens a Premium Plan Account with them, using their robo-advisor services, will be able to send text messages to a human, financial expert who will reply to them within 24 hours – whatever the topic – as long as it’s on finance of course.
Though this is helpful, it does only apply to Premium Plans whereas, in the UK, you can work with a robo-advisor that offers specialist, expert advice on all of their robo-investment plans, like for example Moneyfarm.
Schwab Intelligent Portfolios
Another top robo-advisor that goes beyond the traditional robo-advisor brief is Schwab Intelligent Portfolios. They also offer specialist human, expert advice on all of their products. In addition, they also provide a tax efficiency service whereby if an investor’s portfolio declines in its worth, their auto tax-loss harvesting system comes into play, enabling taxes to be offset against gains on the investment.
The future of hybrid robo-advisors looks bright
The emergence of the hybrid robo-advisor has done much to revitalise what was looking like becoming a short lived new industry. With approximately $7.4 billion-worth of assets under its control, Betterment LLC is the biggest robo-advisor of them all.
But many other hybrids will be continuing to add to the sum total of global funds under robo management that’s for sure, making robo-investing a significant contributor to the ongoing, overall investment scene.