Want to know what a Robo Advisor is? Read our 101 guide.
‘Wealthfront’, ‘Wealthify’, ‘Wealthsimple’, ‘Wealth-who’? Who are these companies so obsessed with wealth? Robo-Advisors. You’ve probably heard one of your friends talking about how ‘cool’ it is to invest without having any human interaction, maybe you’ve seen one of the ads on your commute or perhaps you’ve never even heard of them before reading this?
Virtual investment managers are all the rage for investors who are tired of having to deal with the traditional means of finding someone to give ‘advice’ on how to manage your money, but what do they actually do? How do they work? Is it just recent University graduates who use them, or are experienced investors jumping on the bandwagon too?
In a nutshell, robo-advisors are investment platforms that employ algorithms to manage and allocate your funds. These modern-day asset managers tend to operate in a similar way: you sign up with your personal details and fill out a survey in order to develop a tailored plan according to your financial goals. Whether you are saving for your first property, your next three week break or you just want to do something with the money being left in your bank account with (essentially) a 0% return, the ‘robot’ will recommend a suitable investment product for you, dependent on your personal risk appetite. Once you choose to invest, Artificial Intelligence jumps into the front seat and the robot will automatically manage your money on your behalf.
Previously, such investment services were largely inaccessible for those unable to pay the large fees and earned a large salary, demanded by traditional investment managers. The emergence of robo-advisors has automated things such as application processing, which allows you to do everything from your laptop or mobile phone. But it is important to note that these virtual financial managers aren’t just satisfying the appetite of young investors who cannot afford the fees charged by traditional asset managers. Whilst young people may be drawn to the 1% (or less) fee charged by these digital platforms, compared to the higher fee charged by asset managers, the trend has gradually found favour amongst older investors too.
This year, assets under management of automated investment platforms reached an astonishing $200 billion globally, with this figure expected to rise to $16 trillion by 2025.
The rise of robo-advisors does not however signify a decline of traditional asset managers — as the FT pointed out: ‘technology brings pros and cons, but human managers aren’t quite finished yet’. So perhaps the best gift of all is that robo-advisors are acting as a catalyst for innovation amongst traditional institutions, forcing them to let go of their dinosaur roots. The long-term success of this remains to be seen, so stay tuned.
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