Automated investing involves using digital platforms that allow investors to automate investment decisions and trading. These decisions are based on a series of computerized algorithms that use several variables provided by the user to assess the client’s risk score and determine investment goals; for example, variables such as risk tolerance, income, and age are carefully evaluated by the technology. One of the primary examples of an automated technical investment strategy is using a Robo-advisor, which requires limited human input.
HOW DOES A ROBO-ADVISOR WORK?
In simple terms, a Robo-advisor works by collecting financial information from clients, mainly regarding their current financial situation and any future financial goals. The platform then uses this data to provide the client with advice and automatically invest in client assets if they wish. There are multiple advantages to using a Robo-advisor; for example, goal planning is extremely robust, the fees are low, and the client receives attentive and thorough customer service.
Since the launch of the first Robo-advisor in 2008, the strategy now has a much more efficient way of working, delivering its services directly to customers. Their purpose was to initially rebalance assets within funds, allowing investors to manage investments through an easy online platform. Now, Robo-advisors can handle more sophisticated tasks, for example, retirement planning, investment selection, and tax-loss harvesting.
Robo-advisors are becoming an increasingly popular investment strategy, with predictions for assets being managed this way to reach $987 billion by the end of 2020, and $2.5 trillion worldwide by 2024, according to Statista.
BENEFITS OF ROBO-ADVISORS
Without the need for human involvement, automated platforms provide the same service, if not more advanced, for a much lower cost. This often makes them a better alternative to more traditional financial advisors. In general, a human financial advisor would traditionally charge an annual flat fee of 1 to -2% of their client’s total account balance, but this is drastically lowered to levels ranging between 0.25 to -0.85% for a Robo-advisor.
Money can also be made through the interest earned on cash balances, which wouldn’t be accredited to the client, but will instead be accredited to the automated strategy. Such savings in fees paid by investors makes a big difference to investors’ return over time. Saving in management fees can be compared to the savings investors achieved with the rise of Vanguard’s index funds.
When it comes to fees and expenditures to investors, certain “Robo-advisors” or similar companies bring savings and transparency to the table for investors. However, not all Robo-advisors disclose to investors all their sources of income, at least not explicitly. In some cases, investors are incurring additional costs that they can’t see easily. Furthermore, Robo-advisors that take custody of funds on occasion can make extra money through the interest earned on cash balances, which wouldn’t be accredited to the client, but will instead be accredited to the automated strategy.
Transparency on fees and costs is paramount to investors. It allows the investor to understand the real cost incurred in investing, but it will also enable the investor to determine the actual returns they would earn overtime. Companies like Let Bob that don’t take custody of the clients’ funds bring cost transparency to the next level. Clients pay a small usage fee and an additional fee for using different investment model portfolios. Also, Let Bob discloses to investors additional costs that might be charged to them by asset managers for a given model portfolio. Because there are many different model portfolios to choose from, the investor can select various options and decide whether they pay for a given model. Therefore, Bob is transparent and only charges the investor for access to the investment alternatives and the technology to choose and monitor them.
Accessibility is also improved using an automated investment strategy. Unlike humans, Robo-advisors are available at all hours of the day when the client is connected to the Internet. Rather than waiting for physical appointments with financial advisors, any time from the comfort of their home. In addition, and perhaps more importantly, investors don’t have to be checking on the health of their account or their asset allocation. Instead, the technology keeps track of maintaining the desired asset allocation and keeping investors’ money on track to achieve its goals.
Some would argue there might be some limitations that come with using a traditional Robo-advisor. According to critics, the main limitation is that investors’ opinions are more limited to a single strategy. With traditional Robo-advisors, an investor is unable to purchase stocks or bonds individually with their account. However, companies like Let Bob provide you with the flexibility of using multiple investment strategies, including buying individual stock, bonds, ETFs, and mutual funds. Because Bob doesn’t take custody of the investor’s assets, the investor is free to maintain their money in their online brokerage account. Therefore, the investor can allocate some funds to individual securities of their liking, and the rest can be distributed using Bob and invest in best in class model portfolios.
By leveraging technology, the investor can save time and money while participating in the market using best in class model portfolios designed by leading asset managers. Also, obtaining fee transparency and investment flexibility allows investors the freedom to manage their investments.