Robo Advisors Article

Should you use a robo advisor?

Would you trust a robot to babysit your kids or write a prescription for a medical condition or cut your hair? Or would you?

Since 2008 robo advisors have been gradually increasing in popularity, client assests in 20223 accounted for over 1 Trillion dollars currently and by 2025 the forecast is to be 2.9 Trillion dollars US.

That's a lot of money to put under the care of machines or robots!

Despite the name robo advisor, there are no physical robots involved. The term robo advisor refers to computer based algorithms that can manipulate your portfolio to manage your financial aspirations, situations and goals. We have had access to robo advisors for decades but were mainly beta tested nby financial institutions for forecasting and machine learning of patterns in the economic environment, but nowadays these robo advisors have become accessible to the masses.

Most brokerages are now offering their own versions of robo advisors. So should you trust and use robo advisors? How can you know which is right for you?

Much like a human advisor a robo advisor will ask you questions such as:

Income Savings Investment risk Why are you saving Risk taking

As the market changes and perhaps your saving goals and life conditions change the robo advisor can help you plan in line with global market conditions.

One of the biggest advantages is low barrier of entry

Human advisors charge 1-2% of your investment total Annual Fee a minimum investment!

Robo advisors have no balance requirements nor any minimum financial input. How can they be so much more affordable?

The robo advisor automates repetetive tasks such as Rebalancing and Tax Loss Harvesting

Rebalancing:

The buying and selling of assets to maintain a level of allocation and risk such as:

30% in emerging markets 30% in traditional bluechip stocks 40% in government bonds

If emerging markets start to rally and the advisor will sell off some of those assets and reinvest in other areas to keep the desired ratio of risk and income over time (prediction).

Selling stocks at a profit attracts capital gains and this is where tax loss harvesting come in. By strategically selling other stocks at a loss your advisor can offset the gains as a tax loss. There are rules around this that are enforced by such entities as the IRS etc. Robo advisors are able to strategically position your portfolio daily and make constant changes and predicitions that a human advisor may only do once a year!

The downside of the automation is that you give all investment control to the robo advisor, the robo advisor is based on modern portfolio theory; to diversify the portfolio to just match the market. If you are an investor that wants to beat the market by picking individual stocks, then a robo advisor may not be enough for you. Instead you may wish to try a stock app such as Robin Hood which lets you trade in individual stocks whilst avoiding the fees and minimums. Be warned, whilst a few have made fortunes this way, such as Buffet and others, the vast majority of such investors uunder perform.

If you have complex financial needs such as Estate Planning, Unusual Tax Situations a robo advisor may not be your best option! Robo Advisors have become more complex over the last decade, however they are still mainly attuned to perform basic investment functions.

Some people also want the human touch that comes with a flesh and blood human advisor and to be able to speak human to human with a personal service and connection.

A human advisor will listen, educate, understand your unique situation and goals as well as risk analysis.

For people just entering the world of investing robo advisor is till as sound and cost effective tool that has opened the doors to investing for people often excluded by higher fees and balance minimums.

If you are considering a robo advisor, do look to check that they offer Rebalancing and Tax Lost Harvesting as a minimum requirement. If you want your portfolio to reflect your personal values you can find robo advisors that will offer economically responsible and low or no pollution investments.

Many brokerages also supplement a human advisor with a robo advisor so that you can have the best of both worlds.

Technology is constantly evolving but you should always be aware of how investments work and which Ai advancments are on the horizon. The role of robo advisors is expanding into other areas of portfolio management, and it has been shown that the robo advisors have so far done a good job in portfolio management.