Updated: Mar 29, 2021
About Robo Advisors
Want to invest in the market but don’t have enough funds to fork over to a financial advisor or the experience to self manage the portfolio? You have a perfect solution, Robo Advisors.
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. All you have to do is open a robo managed account, provide some basic information about your investments goals through an online questionnaire. And you are good to go. They use this data applied with mathematical algorithms to give financial advises and also invests in the assets on behalf of the client.
Popular robo advisors like Betterment, Wealthfront, Ellevest keep rebalancing the portfolio on the basis of the market changes to ensure that an optimal asset class weightage is maintained. For example, an allocation strategy might include the requirement to hold 35% in emerging market equities, 30% in domestic blue chips, and 45% in government bonds with a corridor of +/-5% for each asset class. With any fluctuations in the rates, the entire portfolio is rebalanced.
Benefits of Using a Robo Advisor
High-Quality, Low-Cost Portfolios : Many financial advisors charge huge sums which are way higher than your returns on investments and even require a minimum balance in your account. However the advisors offer the same services but at a much lower cost with little or no minimum balance.
Automation of the process: You don’t have to worry whether you should make changes to your portfolio or invest more or less in a given market sector. The robo takes care of everything and are available 24*7.
Tax Efficiency: Most of them offer some form of automated tax-loss harvesting which essentially takes advantage of temporary market losses to offset gains that would otherwise be taxed. The benefits of this strategy are often overstated, but there is still usually a benefit.
Drawbacks of Using Robo Advisors
May not work during down market: Many of these advisors have evolved recently, they haven’t proved their worth or can’t be totally trusted during a critical period as they simply work on algorithms. Coping with turbulent financial times is a much more challenging task, one that the robo advisors have not yet had the opportunity to do.
Not Financial Planners: A good financial planner gets to know you personally and helps you create and implement a plan that uses all of the financial tools and opportunities available to you to reach your specific personal goals. However the advisors are simply a tool that helps you implement and manage your investment portfolio.
Frequent rebalancing: Some robo advisors rebalance daily, others monthly, quarterly or other frequency. Excessive rebalancing could result in many transactions and fees. Also, sales in a taxable account can trigger capital gains taxes.
Robo Advisors in India
FUTURE OF INVESTING
In a nutshell robo advisors have totally changed the investment game by disrupting the market with their efficient, ever ready services and offer a highly digital wealth management experience at a cost low enough to scale as rapidly as necessary. They will also give wealth management firms access to a large new market of millennials who are interested in accumulating wealth, but have had only limited options in terms of investment management. In today’s world they are a boon for young investors who are purely looking for a simple way to implement a high-quality investment portfolio. All in all, with the advent of technology, the future of robo investing looks quite bright and they are definitely here to stay .