Recent trends have indicated a colossal escalation in the popularity of robo-advisors amongst the investors seeking investment related advice. Owing to the tailor made advise, ease of use and minimal cost, these robo-advisors are already escalating the level of tensions amongst the human financial advisors, who are anxious of mislaying a larger chunk of their businesses to an algorithm. This warrants a greater understanding of what exactly robo-advisors are and what they bring to the table.
What are Robo-Advisors?
Robo-Advisors (Robot+Advisors) are basically algorithm driven advisors that render advice to investors and assist in creating their investment portfolios by taking copious factors into consideration such as the risk tolerance, investment outlay, and the market opportunities. They require minimal human involvement. This financial innovation is surely bound to take over a major chunk of the work done by financial advisors, but the main question is can these advisors take over the entire role played by financial advisors?
Advantages of Robo-advisors and the disadvantages of financial advisors:
1.Low minimum- investment requirements Robo-advisors don’t have any minimum investment requirements and an investor with a small investment amount can avail the services of a robo-advisor easily as compared to that of a traditional financial advisor, who generally have some sort of minimum investment requirements.
2. Low cost of operation The robo-advisors are automated advisors, which are based on an algorithm and require minimal human involvement. So, their cost of operation is generally lower than that of traditional financial advisors, who charge higher fee from the investors. This low cost operation benefits the consumers and the financial institution, providing the services to a large extent. Though the initial cost of setting these automated advisors is large but the marginal cost of each unit goes on diminishing continuously and the financial institutions, providing these robo-advisors can take further advantage from the economies of scale, owing to a greater chunk of investors being offered advises at the same time.
3. Lesser possibilities of errors The robo-advisors are characterized by a lesser number of errors and frauds as the results are produced by an algorithm are less susceptible to the frauds. Errors may creep in the tasks done by the human but the possibility of the error reduces to a large extent if the same job is being performed by a machine.
Advantages of financial advisors and disadvantages of the robo-advisors:
- More personalized in nature This is where the traditional financial advisors truly surpass the robo-advisors. The financial advisors offer a more rational advise taking the nature, risk tolerance capability of the investors whereas the robo-advisors use the algorithms to manage the portfolios of the clients and are not designed to take the emotional component of building wealth into consideration.
- One size fits all v/s tailored advice The robo-advisors are cheap relative to the financial advisors because of the fact that they are not specifically designed to offer advice to a particular section but cater to the needs of a higher number of clients at the same time.
- Complete control v/s no control over the transactions The robo-advisors follow a hands-off procedure and don’t allow an investor to exercise any control over the portfolio once it is designed by the algorithm. On the other hand, the financial advisors offer the investors a completely flexible environment.
Robo-Advisors v/s Traditional financial advisors
Robo-Advisors are generally suited for the investors who don’t have the time or any inclination towards managing their own investment portfolios and don’t mind paying a fee for a hands-off approach. These types of investors generally don’t have any desire to discuss the matters face-to-face with somebody. However, the investors having an inclination for managing their own portfolios should give a preference to the financial advisors.
While today, the robo-advisors may be on the losing side in terms of actual value addition for clients, the actual future winners may be a combination of both, similar to what we at savart do. We are combining computing accuracy with human intuition to render the best advice to clients. Ultimately, the return on investment is the most important factor and the real winner remains to be seen.