Robo Advisors: Online Financial Advisors That Fit in Your Pocket
Robo advisors are steadily growing in popularity, and these online investment advisors are threatening to take massive amounts of business away from traditional financial advisors.
Automated financial advisor apps and services will manage approximately 10% of all global assets under management (AUM) by 2020, according to projections from BI Intelligence, Business Insider's premium research service.
But how do robo advisors work? Is automated portfolio management truly better than a human being who manages your funds? And how will robo advisor software change the future of investing?
Read on to learn the basics of robo advisors and what the future holds for this segment of the finance world.
What Is a Robo Advisor?
Robo advisors are automated investment services that use algorithms to manage and allocate people's assets. Robo advisor software analyzes an individual customer's current financial status, risk aversion, and monetary goals, and then recommends the best portfolio of stocks available based on that data. At this point, the robo advisor can manage that portfolio without the need for a human to ever intervene.
And some robo advisors do operate in this standalone manner, but there are other types on the market, as well. Hybrid robo advisors combine this automated investment solution with human input to create a more balanced approach.
Robo Advisor vs. Traditional Financial Advisor
In most cases, companies can offer these robo advisor platforms with much lower fees than traditional human advisors yet still maintain approximately the same return on investment. This allows these companies to market themselves to a much larger segment of the market, such as millennials who might be hesitant to put their trust and their dollars into a human advisor's hands.
Furthermore, robo advisors typically automate the "housekeeping" portion of the investment process, such as application processing. This removes some friction for consumers and also helps companies reduce their labor costs, which in turn translates into savings for customers.
How The Internet Changed Investing
Investors today, especially those who grew up with the Internet accessible to them for most of their lives, likely find it difficult to imagine a world in which they could not simply look up the history of the stocks in their portfolio. But even as recently as 20 years ago, that was not the case.
Before the Internet took off, investors' best option was to brush up on financial trends at the local library, read books written by successful investors, and research individual companies in the newspapers. Or, they could contact companies individually to obtain their quarterly reports. This could be a lengthy process because the investor relations department would need to manually print and mail the reports to the investor.
Now, the Internet makes all of this information accessible in mere seconds. Apple investors can log onto the company's website and download quarterly reports in no time at all. Stock
price information is available from hundreds of sources such as Yahoo! Finance, CNBC, Bloomberg, and more. And of course, experts and financial advisors are everywhere with their analysis on almost every stock on the market.
All of this information at our fingertips has empowered investors, who no longer need to rely on brokers, investment managers, or other intermediaries to filter this data to them.
From there, online financial advisors began to sprout, and robo advisors quickly followed, primarily from startups. One of the first was Betterment in 2008, but dozens of others have risen since then. Two of the more prominent examples are Vanguard. which started testing its Personal Advisor Services in 2013, and Charles Schwab, which debuted its Intelligent Portfolios service in 2015.
From Online to Your Mobile Phone
Mobile has exploded in terms of time spend in almost all areas of technology, and it's no different with financial technology and robo advisors. Mobile apps have made it far more convenient for investors to check their account balance and make whatever moves they deem necessary.
Betterment's app, for example, allows you to access your account and check your balance and investment returns. You can also connect your checking account to the app and, with the iOS version, make deposits and withdrawals.
Wealthfront's app, by contrast, allows you to track your investments and open an account, but customers must perform all other functions on the website.
Personal Capital's app lets you use it even if you aren't a customer. It even lets you monitor all of your investments in one place, even those not a part of Personal Capital. SigFig offers a similar service through its app.
And Charles Schwab allows customers to trade, cancel orders, and more.
As robo advisors continue to grow in popularity, smartphones will become more critical in helping customers manage their investments.
This primer on robo advisors is just the start when it comes to understanding the rapidly growing world of automated investing.
That's why BI Intelligence spent months putting together the greatest and most exhaustive guide on robo advisors entitledThe Robo-Advising Report : Market forecasts, key growth drivers, and how automated asset management will change the advisory industry.
To get your copy of this invaluable guide to the payments industry, choose one of these options:
- Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
- Purchase the Complete Robo-Advisor Research Collection, which contains 5 in-depth reports, slide decks, and appendices. >> BUY THE BUNDLE
- Purchase the report and download it immediately from our research store. >>BUY THE REPORT
The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the fast-moving world of robo advisors .