Robo Advisor

What is a robo advisor?

A robo advisor is a digital platform that provides an automated financial planning service using computer algorithms and advanced software with little to no human supervision or interaction. Sometimes called automated investing services, a robo advisor asks a series of questions about one’s financial situation, future goals, and current assets through an online survey. Once the data is collected, it’s analyzed to offer advice and automatically invest on behalf of the individual. 

Most robo advisors provide goal planning, account services, portfolio management, tax optimization, and account setup. It’s common for those working in the financial and investment advisor sections to use robo advisory software to automate client portfolio management. These tools allow financial professionals to manage client accounts with a wide range of assets.

Robo Advisor Software

Software that mention robo advisor as a feature or term.

Genesys Cloud CX

Human Interest 401(k)

Types of robo advisors

When working with a robo advisor, an individual has the choice between two types. These types are:

• Simplistic: Advisors use conventional profiling to come up with a portfolio. Then, potential investors answer a brief survey designed to assess their risk profile. This data is evaluated in relation to an investor's goal in developing a portfolio.
• Comprehensive: This type of robo advisor goes beyond the standard risk profile survey to create a more in-depth understanding of the investor profile and predict behavior using artificial intelligence (AI) and data.  

How a robo advisor works

The process of working with a robo advisor is relatively easy and usually follows five steps. These steps are:

1. An individual is asked to complete a brief survey or questionnaire to assess investment needs and risk tolerance.
2. The robo advisor begins to build a diversified portfolio of funds.
3. Experts regularly monitor market activity and investments to ensure the portfolio is balanced correctly using a specific algorithm. 
4. When an individual wants to make changes, some robo advisors offer live consultants who provide recommendations on reaching new goals.
5. An individual can log in to their account and track progress, make adjustments, and see how they're working toward each financial goal. 

Basic qualifications of a robo advisor

When an individual is considering working with a robo advisor, specific qualifications should be considered. These qualifications include:

• Type of account: Some robo advisors manage both taxable accounts and individual retirement accounts. Some also manage 401(k)s and various trusts. 

• Minimum investment requirements: It’s common for some robo advisors to require $5,000 or more to start, but the majority have account minimums of $500 or less.

• Portfolio details: When an individual signs up with a robo advisor, the first interaction includes a survey or questionnaire. These questions are designed to assess investing preferences, goals, and risk tolerance. Based on the answers, the robo advisor offers between five and ten portfolio options, ranging from conservative to aggressive. The algorithm will recommend which one to choose based on the answers. 

Benefits of a robo advisor

There are many advantages to working with a robo advisor. Robo-advisors are beneficial because they are:

• Budget-friendly: A low-cost alternative to a traditional financial advisor. This is due to eliminating human labor, allowing online platforms to offer the same services at a fraction of the cost.
• Easily accessible: Most robo advisors can be reached 24 hours a day, seven days a week, as long as an individual has an internet connection.
• Highly efficient: Before robo advisors, an individual would need to call or physically meet a financial advisor to explain their needs and wait for the trade to be executed. Now, all it takes is a few clicks from anywhere.
• Free of human bias: An artificial intelligence (AI) robo advisor uses a mathematical algorithm to assess and assist an investor, making them impartial and free of bias.
• Comprehensive: A robo advisor comes with various services that take care of financial planning. This can include retirement planning, rebalancing a portfolio, tax strategies, and more.

Robo advisor best practices

When working with a robo advisor, there are best practices to follow to ensure the partnership is a success. Follow these best practices:

• Consider financial goals: An investor should clearly understand their goals before deciding to work with a robo advisor. Knowing what result is wanted and what type of investments to proceed with can assist in finding the correct type of robo advisor.
• Have a timeline: Once goals are established, investors need to consider their timeline. This will assist in creating a customized portfolio.
• Understand fees and minimums: The cost of robo advisories and the minimum investment levels vary by platform and service. Some don’t have a minimum to open an account, and with account fees as low as 0.25%, it could mean $25 for every $10,000 invested. Inventors who need minimal support and portfolio management should look for the lowest management fee.
• Review support plans: An individual who wants to speak to an advisor should understand the robo advisor’s support services, whether it’s available 24/7 or during certain hours.

Robo advisors vs. traditional human advisors

A robo advisor is ideal for a single investment goal to keep an individual on track with automated portfolio balancing. As a digital platform, they are a low-cost financial planning option. 

A traditional human advisor is best suited for more complex financial services, like estate planning. This type of advisor meets with clients in-person and charges higher fees for more specialized and dedicated attention. Plus, they usually develop a more holistic view of a client’s finances with access to all of their accounts.