Robo-Advisors: What Are They?

A robo-advisor refers to an online wealth management service created with the aim of providing automated and algorithm based portfolio
management. Unlike other ways of wealth management, robo-advisors do not have human financial planners. All the management is done via computer programes and there is no human-human interaction. They use the same software as the normal advisors. However, robo-advisors only offer portfolio management as there is no personal aspect of wealth management. They therefore, do not have other personalized services such as estate planning and administration, retirement and taxes.

Typically, they are low-cost and have low account minimums hence attracting younger investors who prefer doing their wealth management online. The greatest different between the traditional human advisors and robo-advisors is the distribution channel. Traditionally, investors would have to use a human financial advisor so as to access portfolio management services.

The ease of accessing robo-advisors and their low cost investing has made them popular among investors. It is estimated that the overall assets under their management will reach $2.5 trillion by the year 2022. The sudden increase in the wealth under their management suggests that these advisors are doing something right hence their popularity.

Actionable advice

Robo advisors offer actionable advice especially during this turbulent periods that the wealth management industry is experiencing. The industry has always put profits ahead at the expense of the people. This has always made them charge higher fees for managing wealth on behalf of their clients. Consequently, this often leads to poor performance. This means that returns from traditional advisors have always
been low and this prompted investors to ask themselves if these investors actually do anything. Robo advisors identified this weakness and decided to capitalize on it.

Portfolio construction

Robo-advisors offer cost effective portfolios constructed with the aim of accessing some underlying markets. The investors allocate client funds in line with the overall risk tolerance in diverse asset classes including international bonds, stocks, US bonds and stocks. Individual asset allocations usually depend on factors like the time horizon, saving goal and overall risk of the investor. Each robo advisor firm
carries out and independent assessment by using an in depth questionnaire that seeks to understand the current financial position of the client and his or her savings goals. After this profile has been created, the investors then establish a model portfolio. For instance, an investor with moderate risk tolerance will see the advisor investing in fixed income and equities on behalf of the investor.