Fintech evolution has already gifted plenty of useful solutions to turn around a human’s life. Every day, we benefit from different fruits of digitalization including banking apps, online payments, lending platforms, etc. Another trend to benefit from is robo-advisors.
What are robo-advisors?
Virtual assistants became an integral part of our daily routine. This sort of software helps us with different tasks that are mostly related to communication. Robo advisors are similar to conversational interfaces used in travel, e-commerce, banking and other industries. But unlike general purpose chatbots, robo advisors provide assistance in a specific focus area – investment. Formerly, if you wanted to find a good project to allocate your assets, you needed either to hire a financial advisor or perform substantial analytics on your own. Now, a dedicated online software can cope with this task in the most effective way.
Robo-advisors are designed to execute many functions for building and managing an investment portfolio. They assist in selecting investment projects, automating rebalancing, tax-loss harvesting, as well as educate users on how to make investment decisions.
What features are common for all robo advisors?
The number of fintech software in the wealth management category keeps growing, and it may be challenging to make a choice between different tools. Nevertheless, you should be aware that all robo-advisors share several common features.
Algorithms
A powerful algorithm underlies any intelligent robo-advisor. Because software that powers robo advisors has to perform tremendous analytical research to provide customers with the best investing prompts, developers implement a variety of algorithms to automate this process. Some of these algorithms can’t do without human involvement. However, a new generation of solutions based on machine learning techniques excludes any human touch in the process of investment analysis.
Pricing
With robo-advisors, you do not have to pay extra money for trading, transfer, rebalancing and other transactions that are usually charged for. The annual fee for using a robo advisor differs, but it’s not exorbitant. Fees are kept low because with robo advisors you invest in ETFs (exchange-traded funds) which allow you to leverage numerous asset classes (international stocks, large/small cap stocks, etc.) with instant diversification. The services of investment experts who help you manage packed-with-securities portfolios cost much more.
Personalized recommendations
This feature is especially beneficial for users with small or zero investment experience. The software makes recommendations based on your answers to the questionnaire placed on the website and your previous investment experience. Interaction with a human advisor is replaced with online communication.
Types of robo-advisors
Until recently, we could divide robo-advisors into two categories – robos and hybrids. However, the uprise of artificial intelligence technologies gave birth to another category of fintech investment solutions. Let’s have a look at their principal differences.
Robos
Robo is a fully-automated solution, which requires almost no human touch on the client’s part. It means that you pay for complete automation of investment activities, which relies on the provided data such as age, period left until retirement, risk attitude, investing experience, etc.
Hybrids
Judging by the name, a hybrid robo-advisor combines human involvement and scientific algorithms for investing activities. It is interesting that this category is expected to grow at a faster pace than its automated analog. However, you should be prepared to pay more for hybrid solutions because they add a human touch and are considered more reliable.
AI-based
Implementation of artificial intelligence in robo-advisors enhances their capabilities in terms of behavioral analytics, big data, and cognitive computing. AI-driven algorithms replace human touch and because they can understand user’s needs and behavior, they can significantly augment the performance of digital investment tools. In a nutshell, you get a human-like automated solution that combines the best of robos and hybrids.
Top robo-advisors
We have said many praiseful words about this investment management software but haven’t mentioned any example. Let’s fix this mistake and introduce top robo-advisors available on the market.
Betterment (Robo)
Betterment is the oldest and most popular robo-advisor. It has no minimum threshold to invest that makes it attractive to novices in the industry. There are two annual fee options – 0.25% and 0.4%, which depend on the amount you invest. Your work with Betterment starts with a short survey to shape the future automatic investing plan.
Personal Capital (Hybrid)
If you are not ready to assign your funds to a fully-automated algorithm, Personal Capital may be the option. The service offers three financial plans (Investment Service, Wealth Management, Private Client) depending on the amount you want to invest. The annual fee is calculated according to the chosen investment plan and a set of options you select.
AgentRisk (AI-based)
AgentRisk provides investing with artificial intelligence. The service leverages machine learning to build portfolios and put your assets to work. AgentRisk is pricier than traditional robos but it costs less than most hybrid solutions. The annual salary of your personal AI-driven wealth management of your account value. However, the minimum amount you’re required to invest is $50K.
Pros and cons of robo-advisors
Each coin has two sides. As for robo-advisors, they also have their benefits and drawbacks, which make them either attractive or not for investment activities.
| Pros | Cons |
| ● Simple to start
● Leverage the best of automation ● Cover different portfolio sizes ● Affordable annual fees ● AI-driven solutions are expected to provide human-like interaction ● No human bias |
● Lack of flexibility
● Limited view of an investor’s financial health ● Do not allow for investor’s input into particular assets ● No emotional support, which some investors may need in. |
So, it’s up to you to decide whether you are ready to put up with the negative side of using robo-advisors. Meanwhile, the AI development is likely to remove the above mentioned gaps in the coming years.
