By definition a robo-advisor is a digital platform that provides automated and algorithm-driven financial planning recommendations with little to no supervision. That means individual investors with little to no financial literacy can turn to robo-advisors to tell them which stocks to invest in, though experts argue it will not be a replacement to financial literacy.
Expert investors argue the idea of turning to a robot for tips on investments, then going forward to making it big in the investment world just sounds too simple to be true. Indeed, people who have been investing in stocks for a while will tell you a great deal of financial literate judgment goes into picking the right stock and at the right time. One would need a great deal of trust in the robo-advisor to use its recommendations.
How a Robo-advisor works
Would be ‘rookie investor’ access the the robo-advisor services via a website or an app; the gist of it is to eliminate need for human interaction. Then they are taken through the three steps below:
The initial investor screening, where the robo-advisor asks the client a series of questions to determine their risk-return profile.
Based on the established risk-return profile of the client, the robo-advisor will implement an investment strategy that allocates money to the type of investment (with risk-return mix) that fits the client’s profile.
The robot will then start monitoring and evaluating the client’s investment(s) over time and if need be make necessary re-adjustments.
The services of robo-advisor are becoming popular because of the affordability of their services; charged between 0.15% to 0.67% of the client’s investments in the United States, and an average of 0.8% in the EU. When compared to the 1% charged by financial planners and wealth managers, it is easy to see why robo-advisor are becoming popular.
Additionally, with robo-advisor, there is no such thing as a minimum investment amount, meaning virtually anyone with some savings can participate. This move goes along way in promoting financial and investment inclusion of the masses.
Traditionally, these robo services are popular with millennial aged 24-35 as they prefer self-service system and are typically quicker to adopt to new technology. Stats from 2013 to 2014 show 50-60% of robo-advisor cclients were indeed millennial. However, more recently, the stats are showing a rise in the number of individuals within their mid-40s and a six-figure balances in their accounts. This development only goes to show more and more people are trusting these robots when it comes to picking stocks.
Ironically, the more educated investors use the robo-advisors more often when compared to the less educated investors. The robo-advisors typically provides clients a mix of diversified and low-cost investments mainly in Exchange-Traded Funds (ETFs).