What are robo-advisors and what should I know?

Original version published by Dominic Beattie.

In recent years, the financial technology industry (fintech) has given rise to automated advice services popularly known as ‘robo-advisors’. These robo-advisors are designed to do part of the job of a financial advisor but at a lower cost and, it is claimed, with more efficiency.

So, what do robo-advisors have to offer?

What are robo-advisors?

Robo-advice burst onto the scene a few years ago in the US but has since spread around the world.

It is essentially a computer program comprising complex algorithms and mathematical models that aims to match a client’s risk profile with an asset allocation.

They generally work by asking customers to initially input information regarding their financial status such as their income, life stage, risk profile and how much they have to invest. The program then uses this information to allocate the client’s funds towards particular asset classes with the intention of achieving investment returns that align with their specific goals.

Pros and cons

Robo-advice offers a number of potential benefits to investors but there are a few reasons why they aren’t likely to completely take over human financial planners.

Pros

  • No human error: They take the human emotion and irrationality out of investing and focus on the pure fundamental numbers.
  • Tax efficiency: They may have automatically programmed in tax efficiency.
  • Prompt decision-making: Robo-advice may provide timely reminders to clients when they reach investment milestones and need to make a decision.
  • Lower costs: Robo-advice may be cheaper than having an advisor.

Cons

  • Less options: Many won’t offer the full range of advice services that are typically provided by a financial planner. For example estate planning, tax planning and a broader range of investment options.
  • Lack of in-depth insight: Robo-advisors can’t foresee potential risks on the horizon (e.g. housing bubble, RBA rate changes).
  • No personal touch: Robo-advice lacks a human understanding of personal circumstances and can’t really adapt as much to your life’s changes. By using robo-advice, you miss out on the development of a relationship of trust between advisor and client.

How will robo-advice impact the financial services industry?

So, are robo-advisors a threat to everyday financial planners/advisors? Rather than being a threat, robo-advice might actually be a tool for professional advisors to work with, as suggested by US report Embracing Change as Opportunity. The report says:

“Embracing technology does not mean replacing human advisers. Combining the human touch of an experienced financial adviser with the logic, fee transparency, methodology and accessibility offered by robo-adviser platforms can be a powerful combination for an adviser’s practice model.” 

Deciding on which route to take, either personal advice or robo-advice, will depend on your needs and goals. However, no matter how sophisticated robo-advice becomes, remember that it will only ever be able to offer limited advice based on the data you input.

 For more articles like this sent straight to your inbox, sign up to our newsletter below. 

Similar Topics:

Share this article