The era of the robo-advisor is upon us

The digital wealth industry has recently entered a new era. It is the era of robo-investing. When the financial world went pear-shaped back in the year 2008, financial gurus got together and decided they needed a new platform. This new platform was to give them a clearer insight into what was happening in the world of investing. They demanded new software that would enable them to be able to rebalance the assets belonging to investors within time-balanced target structures, online.

The software that was developed was a series of algorithms, and these have morphed into the workings of what we now refer to in the digital wealth industry, as robo-advisors.

The origins of the robo-advisor concept

Like any other industry, the digital wealth community is constantly evolving. Many investors had their hands bitten quite sharply when the world economy went into turmoil in 2008. The rebalancing software that came into being at that time promised a quick and easy way of revaluing investment portfolios.

With investors licking their wounds and looking to reconsolidate and minimise fees in terms of managing their stricken investments, the idea of making this rebalancing software available directly to the public carried promise.

The birth of the first robo-advisor

Until that point in time, this software was only available as a tool for independent financial advisors (IFAs). They had been using this type of software since the early 2000s and charged for it in their investment management fees. However, in 2008, Betterment LLC decided to make these algorithms available directly to the customer at a considerably reduced cost. The first robo-advisor was born.

Initially, the robo service that was provided was basic. It was little more than a rebalancing of investment portfolios when they showed signs of underperforming. Rather than an active service, rebalancing is considered to be passive – a simple buy and hold strategy.

The main attractions of using a robo-advisor

The main attraction that robo advisors offer investors is that they provide a low-cost alternative to traditional financial advisors. By taking out the human element, these new online platforms drastically lowered costs. Whereas a traditional financial advisor would charge an investor a fee somewhere between 1% and 2% of their account balance, the majority of robo advisors only charge somewhere around 0.2% to 0.5%. Some offer their services free of charge.

In addition to lower costs, robo-advisors are generally much more accessible. Because the service is fully automated and online; they are open 24/7/365. All the investor needs is an internet connection and an online device.

Another big incentive that drives a lot of investors into the robo-advisor niche is that they can begin investing with far smaller amounts of cash. In actual fact, Betterment LLC has no minimum start-up at all. This is in stark contrast to most other financial advisors who won’t handle investment accounts of less than $100,000.

Online robo-platforms have something else going for them too. If an investor wants to instigate a trade, he/she doesn’t have to call or meet with their financial advisor. All he/she has to do is to click a mouse to action any changes online, at any time of day or night.

Bringing investment opportunity to the masses

When they first launched, the service that robo-advisors provided was simple and limited. Their main appeal was to those who wanted to invest their savings; those whose savings would ordinarily have been considered too small by conventional IFA standards, and those who wanted little or no involvement in the decision making of their investment.

However, in order to bring this type of digital wealth management to a wider audience, leading robo-advisors like Betterment LL, Wealthfront and Moneyfarm began adding additional services into the mix. These services included things like tax-loss harvesting.

Robo-investing has now carved out a well-established niche in the global investment industry, and as the service continues to grow and evolve, more and more investors are likely to be attracted to its simplicity and effectiveness.

Bringing human, financial expertise into the mix

Whereas once-upon-a-time robo-advisors were nothing more than a set of remote algorithms, to which investors had access but little or no influence on what happened with their portfolios, many are now introducing human, financial experts into their service offering. These experts are there to overlook the performance of the algorithms and advise investors what action should be taken if their investments are underperforming.

Given the progressive nature of digital wealth management, this progression is likely to be just the beginning of robo-investment evolution.

Where robo-investing will go from here

Robo-influence will probably be extended to automate other branches of the financial advisory industry. Increasing automation brings scalability, and scalability facilitates cost control, bringing robo services to an ever growing cross section of investors.

Areas such as saving for college and university, streamlining and planning tax efficiencies, and managing an individual’s cash flow could all one day be a standard part of the robo-investment offering.


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