The digital world has transformed professional industries in unique ways that prior to internet access would have been impossible. Doctors can monitor patients remotely, lawyers can offer counsel online, software can complete your taxes for you, and even financial investments and advising can be made without any face-to-face contact. To some this would sound ludicrous and to others it sounds convenient, but one thing is for certain—the robo-advisor is another option that’s here to stay for investors to potentially grow wealth. Robo-advisors have amassed assets at a strong pace; it’s expected to hit $285 billion in 2017, although this is only a small sliver of the of the giant industry that is asset management.  

Unlike some digital professional services where you speak or chat with a human on the other end, the robo-advisor doesn’t involve an actual human advisor to give advice on portfolio or wealth management. The rise of the algorithm-based, automated machine is just what it sounds like—a robot. No, R2D2 isn’t balancing risk against performance for you. The automated computer programs utilize complicated algorithms to make investment decisions with your money based on basic online questionnaires that measure goals and risk tolerance. They’re programmed to rebalance portfolios, make trades, and complete comprehensive report generation among other asset management essentials.

Robo-Revelations

There are multitude of potential benefits for those who choose to go the robo-advisor route. First off, robo-advisors use algorithms that are constantly “learning;” Moore’s Law projects that computers will equal the human brain’s processing power by 2025, so you’re certainly not losing out on speedy, intelligent decision making.

If fees are a big deciding factor than robo-advising may be a good bet Naturally, the computer charges less than a human (with kids, mortgage, and a car payment); robo-advisor fees generally fall between 0.15 to 0.5 percent of assets under management. In comparison, average humans charge at least one percent of assets under their purview.

You’re likely heard of some of the top robo-advisor companies like the top ranked Vanguard Personal Advisor Services, Betterment, Wealthfront, and Future Advisor. These programs are typically designed with a clean user experiance and simple steps. Plus, if anything goes haywire with the automated advisor or the process becomes too complicated there’s always customer service.

Where Humans Still Have the Upper Hand

Yet, the need for the walking-talking financial advisor with an office, not a GB of app space, is still present. Many people naturally feel more comfortable with a human they can look in the eye and trust to make important financial decisions rather than tossing money into the void that is the internet.

The human financial advisor has experience. Sure, the robo-advisor is programmed to do a specific number of tasks very well, but it can never have the real world experience of someone who has, say, led clients through a financial crisis like that of 2008. In the same way the robo-advisor is purely objective, the human advisor has innate subjectivity that can come in useful. In times of economic uncertainty, a real world financial advisor can act as a voice of reason against pulling out all investments regardless of the overall detriment that may occur. Financial advisors are also superior at looking at the big picture beyond just the monetary aspect of your life. They can incorporate elements like your estate plan, trusts, taxes, debts, and any long term monetary goals that may make your situation different than the more typical

Also, a traditional financial advisor can complete investment strategies that require more than an algorithm. Tactics like purchasing individual stocks or dealing with options from an existing portfolio can go beyond the scope of what robo-advisors offer.

Luckily, the financial service industry is molding itself so you can have the best of both worlds. Many firms acquired or developed different robo-advising companies so they offer hybrid models of robo-advising mixed with human contact on occasion. This keeps the traditional trusting, personal connection with an understanding advisor, but also frees up the daily management for the advisor to take on additional clients.

Resources

1. https://www.bloomberg.com/view/articles/2017-03-14/untested-robo-advisers-are-becoming-a-big-market-risk
2. http://blogs.wsj.com/briefly/2015/07/27/the-pros-and-cons-of-robo-advising/
3. http://advisorlearningcenter.com/practice-management/articles-practice-management/robo-advisor-financial-advisor-friend-foe/
4. https://www.thestreet.com/story/13256668/7/10-best-robo-advisors-ranked-find-the-best-automated-online-investing-services.html
5. http://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp
6. https://www.equities.com/news/the-benefits-and-drawbacks-of-robo-advisors
7. http://www.roboadvisorpros.com/robo-investment-advice-pros-and-cons/
8. http://www.investopedia.com/articles/personal-finance/010616/pros-cons-using-roboadvisor.asp
9. http://www.businessinsider.com/this-group-will-benefit-most-from-robo-advisors-2016-11?IR=T
10. https://www.equityinstitutional.com/EquityInstitutional/media/Documents/robo-advisor-whitepaper.pdf
11. http://cashmoneylife.com/investing-with-robo-advisors/
12. https://smartasset.com/investing/pros-and-cons-of-using-a-robo-advisor-to-build-wealth

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2021 Advisor Websites.