What is a Robo-Advisor? In this article we are going to explain what is a robo-advisor, how does it work and why they’re a threat for Wealth Managers (and a great tool for customers!).
An introduction to robo-advisors
Believe it or not, the term “robo-advisor” is a mix between “robot” and “advisor”. Once we have explained this mind-blowing fact, we can go a bit deeper…
With the rise of Artificial Intelligence and automation, robo-advisors are the logical step in the evolution of the asset and wealth management industry. They are, in short, an online software that helps users manage their investments, by automating the process of selection.
They can be quite sophisticated, and they’re becoming a real threat for -human- professionals, since they can be a proper alternative in many cases.
Robo-advisors choose automatically the most interesting investments for each user, and they help you build a diversified portfolio. Once your funds are invested, the software makes any necessary changes to make sure that your investments are aligned with your preferences.
They’re perfect if you can’t afford to hire a financial advisor, or if you prefer to manage your investments on your own.
How do robo-advisors work?
Every robo-advisors starts asking some questions. The user might have to complete a questionary with questions as simple as these:
- How old are you?
- Do you want to invest for short, the intermediate or the long term?
- What's your household income?
- What percentage of that income do you save?
- What's your risk tolerance?
Some robo-advisors pose more complex questions, others require just a few data from the customer. In the end, it’s always a quick process that won’t take more than a few minutes.
Depending on the user’s replies, they’ll draft a potential investment plan. Once that’s done, it’s up to the customer to decide if he/she invests.
What are the fees of a robo-advisor?
Robo advisors are a low-cost alternative to traditional wealth managers. However, they do not come without costs.
When using this kind of tools, customers usually face two different fees:
- Advisory fees: A service fee that may vary depending on the advice-robo you choose and your account balance. According to a study conducted by Value Penguin, the average fee is 0.25%.
- Some advice-robos require a minimum amount of money to open your account. In some cases, there isn’t a minimum quantity, but there are companies that ask for amounts that go from $5,000 to $100,000.
- Other fees: Each advice-robo has different extra fees. Some of them charge trade fees that could go up to around $50, others require a $250 payment to open your account, etc.
Are robo-advisors a threat for wealth managers?
Yes, there are some that see robo-advisors as an actual threat. The wealth management industry has been using software for years, and technology has always been beneficial for the entire value chain. And that’s not going to change - on the contrary, the use of technology will continue to grow, often at the expense of human professionals.
Until recently, wealth management services weren’t scalable. Robo-advisors have come to change that.
However, it’s the human factor what makes the real difference between an average and an excellent service. Those investors that require a more customized service probably won’t find a robo-advisor to be enough. Otherwise, for someone that just wants to put their investments in “auto-mode”, they might be a great tool.
How can Wealth Managers leverage robo-advisors to offer a better service
Because they definitely can! Robo-advisors are useful for users, but asset and wealth managers can also benefit from them.
A wealth manager can use robo-advisors as a tool to speed up their work. Robo-advisors give objective information, not influenced by opinions. Once the professional has gathered the information from the automatized platform, they can complement it with their own knowledge and offer a more comprehensive service. Also, they can be really useful to enhance ESG investing or retirement planning.
This helps companies reduce costs, be more efficient and offer an unbeatable service.
Robo-advisors are the last big thing in Wealth Management, but innovation comes in many shapes.
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