Contents
Introduction
A Robo advisory is a program that uses complex algorithms to research and analyze market trends to advise investors accordingly. Robo Advisors compare and evaluate mutual funds with different types of mutual funds to provide the best option to the clients. With the smallest effort from the investment managers, the software calculates data to generate reports on the type and duration of asset or security for investing.
Robo Advisors
Robo advisors are digital platforms that provide automated financial planning services with little to no human supervision to provide the best mutual fund options for beginners. These financial advisors are often quite inexpensive and require very low opening balances. Thus everybody can avail of the benefits from a Robo advisory in selecting the best Mutual funds for them.
How does a Robo advisory work?
To avail the Robo advisory services, all you need to do is give your inputs. These inputs include the kind of services you would require, your expectations, risk appetite, and financial goals. The Robo advisor then runs a couple of complex algorithms. It obtains the positions and securities you should invest in and the duration of investment based on the advantages and disadvantages of the mutual funds. And can formulate the best investment option for you, based on the inputs you have provided and the list of mutual funds provided by Robo advisor. Robo-advisory is 100% analysis-based and does not rely on decision-making based on any gut feeling or emotions.
What Investments Are Used by Robo Advisors
Most Robo advisors use mutual funds or exchange-traded funds to build the portfolio. They do not use individual stocks. Robo advisors typically track an index fund based on modern portfolio theory research. According to this research, the most important factor is your allocation to stocks or bonds. After this, you should focus on underlying stock asset classes, such as large capital funds, small-cap, or international. Lastly, you should take into account underlying bond asset classes, such as short, intermediate, or long-term. Using the Robo advisor, the software does all this for you.
Benefits of Using Robo-Advisory
The main advantage of Robo-advisor is that they are a relatively cheaper alternative to traditional fund advisors. By eliminating human labor, online platforms can offer the same services at a fraction of the cost. Most Robo-advisors are charging an annual flat fee of 0.2% – 0.5% of a client’s total account balance. That compares with the typical rate of 1% to 2% charged by a human Mutual Fund Manager.
Robo-advisors are more accessible. They are available 24/7 as long as the user has an Internet connection. Moreover, it takes less capital to get started, as the minimum assets required to register for an account are typically in the hundreds to thousands.
In contrast, human advisors normally take on clients with high-net-worth individuals who need a variety of wealth management services and can afford to pay for them.
Efficiency is also an important advantage of these online platforms.
For example, before Robo-advisors, if a client wanted to execute a trade, he/she would have to call or physically meet a financial advisor, explain their needs, fill out the paperwork and wait. Now, all of that can be done with the click of a few buttons in the comfort of one’s home.
Why is Robo Advisory better than others?
Robo-advisors are considered better than most advisory services available currently. Here are a few reasons why more and more investors seek Robo-advisors to ascertain the best investment plan in the market for themselves.
100% research-based: Robo-advisors are fully research-based services. They use several parameters to conduct a deep analysis before concluding which security client should invest in. The Robo advisory is emotion-free, which makes the prospective losses driven by the emotions of greed and fear fall to a larger extent.
Extensively analytical process: Robo-advisors analyze the securities under different parameters by feeding inputs of a different set of combinations. The process involves looking into multiple dimensions. This eliminates the possibility of leaving out any parameters, which generally happens when the analysis is made manually. Complex algorithms ensure better precision and accuracy in terms of decision-making and avert any loopholes for slippage.
Charge lower fees: The maintenance of software is quite less as compared to hiring experienced fund managers. Thus, Robo-advisory services charge a lower fee, which helps you save some money otherwise given as hefty fees.
Offer a range of services: Robo-advisors offer a variety of services that can be useful in catering to a large group of investors based on their budget, risk appetite, and the term of the investment. It is this versatility that makes Robo-advisors a good go-to option for consulting.
Shortcomings of Robo-Advisory
The entry of Robo-advisors has broken down some of the traditional barriers between the financial services world and average consumers. Because of these online platforms, sound financial planning is now accessible to everyone, not just high-net-worth individuals.
Still, many in the industry have doubts about the possibility of Robo advisors as a one-size-fits-all solution to wealth management. Given the relative development of their technological capabilities and minimal human presence, Robo-advisors have been criticized for lacking in empathy and sophistication.
They are good entry-level tools for people with small accounts and limited investment experience, namely Millennials, but far from sufficient for those who need advanced services like estate planning, complicated tax management, trust fund administration, and retirement planning.
Automated services are also ill-equipped to deal with unexpected crises or extraordinary situations. For instance, if a young person’s parents passed away and he/she receives an inheritance, going online to a Robo-advisor to manage the lump sum money is probably not the optimal decision.
Robo-advisors operate on the assumption that clients have defined goals and a clear understanding of their financial circumstances, to begin with. For many, that is not the case. Answering questions like “Is your risk tolerance low, moderate or high” presupposes the user has a fundamental knowledge of investment concepts and the real-life implications of each option they choose.
Conclusion
Robo-advisor technologies are focused on investments and retirement. Not usually on getting out of debt or building an emergency fund. On the other hand, working with a human advisor can help balance your logical perspective with your emotional one when it comes to considering any financial decision. Thus you can come to our financial advisors at WealthBucket to have a personal touch during financial plannings.
All types of mutual fund services are provided by us just log into our website WealthBucket. It is a perfect service platform that can give you a complete guide to mutual funds and help you. Also, you can give us a call on +91 9999379929. Our expert team will help you to solve all the doubts connected with mutual funds.
Even you can mail us on contact@wealthbucket.in
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