Fintech Tips: A five-step guide to robo advisors

By Roger Baird on 11th June 2019

Robo-Advice

Robo advisors are a little of a decade old and manage €14bn in Europe. Here’s what you should know about them.

Fintech Tips: A five-step guide to robo advisors
Image source: Image by kiquebg from Pixabay

 

Robo advisors automatically manage investment portfolios and charge investors low fees. But these platforms, which first began to appear in 2008 in the wake of the financial crisis, and have grown in recent years.

“Adoption of robo-advice in Europe has been fast over the past three or so years. With some €14bn in assets under management at the end of 2018 and around 900,000 clients, the market size and client base of robo-advisory services have about doubled in the past 12 months,” said a Deutsche Bank research note in February.

However, these types of services have limitations, and investors must weigh up whether it is right for you.

 

What is a robo advisor?

A robo-advisor is online investment software, which picks and manages your investments.

This is still a small and growing market and many of the players are new and brands, such as Nutmeg, Scalable Capital, Fountain, Tiller and Exo Investing. However, larger US financial services groups have large positions in this market such as Fidelity’s Fidelity Go, Vanguard’s Vanguard Personal Adviser Services and Merrill Lynch’s Merrill Edge Guided Investing.

 

How does a robo advisor work?

Simplicity is a key feature of this type of investing.

All investors need to do is create a username and password and typically answer between 10 to 15 basic financial questions to open an account.

The service then plugs your answers into an algorithm that determines the portfolio and asset allocation that is appropriate for your age, risk tolerance and how long you wish to invest.

Rob advisors typically follow passive investments such as tracker funds and exchange traded funds (ETF) based on modern portfolio theory research.

 

Is a robo advisor right for me?

Another key feature of this system is that it is cheap form of investing. An online advisory service charges around 0.25 per cent fee, compared to 1 per cent charged by a human. Some robo advisors allow you to open an account without putting a penny into at the start.

This may suit new investors and young professionals who are looking to build a portfolio.

 

What are the pros of robo advisors?

The two biggest advantages of these services have already been mentioned, they are simple to set up and cheap to run.

Some advocates argue these advisors - if left alone by investors - take the emotion out of investing. These algorithms do not work on gut feeling, changes to your portfolio are made automatically, based on historical and relative market movements.

 

What are the cons of robo advisors?

Critics say the lack of a human financial planner is a failing. An informed conversation can be worth its weight in gold. Think of the number of times a colleague has passed on crucial advice about work at a water cooler, or a bar after office hours. Also, as an investor’s circumstances change then so should their financial planning. Fifteen questions will not cover a long-term investment strategy.

These automated services track passive indices, such as most ETFs, which are available to the public without having to pay the robo-advisor fee that is added on top to the underlying mutual fund or ETF fees. Critics argue that many unsophisticated investors have even market experience to track passive funds.    

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