A robo-advisor is a digital form of financial advisory service which relies on algorithms in order to offer advice, meaning there is little human intervention.
How do robo-advisors work?
The process behind robo-advice is largely similar to traditional financial advice, but instead of talking to a financial advisor about your situation and goals, you fill out an online survey. The robo-advisor then takes all of the information you provided, and either develops an investment plan or offers a portfolio of investments accordingly. Some services will even automatically invest your capital based on how you complete the survey.
There are important distinctions to note, though, between robo and traditional advisory services. While robo-advice is constantly growing in sophistication, it is still mostly limited to asset allocation and risk profiling while complicated services like estate planning, cash-flow or debt management may require an independent financial advisor (IFA).
Why do investors use robo-advisors?
Robo-advisors offer many benefits over other forms of investment. But there are three key reasons why they are proving so popular:
- Cost: because they don’t rely on human intervention, robo-advisors tend to have far lower fees than traditional wealth managers or IFAs
- Accessibility: you can access robo-advisors online 24 hours a day, so it’s easy to sign up, withdraw funds or manage your investments
- Low cost of entry: with robo-advisors, you can often invest with sums as low as £500
All of the above makes robo-advice available to a much larger group of people than wealth management was previously. Young people, or those without large savings, can now get involved in investing.
Drawbacks of robo-advisors
Everyone’s financial situation is unique, but that fact isn’t always taken into account by robo-advisors.
A robo-advisor is hugely reliant on the information you provide it with when you sign up, and filling out an online survey doesn’t always give as much of a comprehensive picture as sitting down with an IFA. That means that complications in your financial circumstances may not be considered by your robo-advisor.
That’s usually not a problem, especially if you are aware of the shortcomings of robo-advice going in. But for many investors, a mix of robo-advice and human intervention is often the best option, at least until robo-advice reaches its full potential.