Should you consider a Robo Adviser?

Robo Advisers

Robo Adviser

Robo Advisers are software programs that generate and manage customized portfolio for investors.

These portfolio management programs are a class of financial adviser that provides portfolio management online with minimal human intervention.

What’s unique about these services is they offer advice with minimal human intermediary action. Instead, they utilize portfolio management software which functions off investment algorithms. Note that they cannot completely replace a financial planner for wealth management because they can’t aid in personal aspects such as estate planning or unique tax management.

Robo advisers are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online.

The biggest difference is the distribution channel: previously, investors would have to go through a human financial advisor to get the kind of portfolio management services Robo advisers now offer, and those services would be bundled with additional services.

Many Robo advisers use Modern Portfolio Theory (MPT), a mathematical formula that aims to help you maximize returns and minimize risk, based your individual risk tolerance.

Robo-advisors can be a great option for new investors looking to start building wealth. Instead of waiting until you have enough capital to work with a financial adviser, you can put your money to work and start seeing returns sooner rather than later.

A disadvantage of most Robo advisers is that their portfolios may be less tailored to an individual’s personal situation than an actual human adviser. Consumers need to understand that a Robo-adviser won’t protect the investor from the inherent volatility of investing in the financial markets.

Should you trade your financial adviser for a Robo-adviser?

It’s one thing to say you have a certain risk tolerance; it’s quite another to stick with a recommended asset allocation when the going gets tough. Many people need and depend on a trusted person who can counsel them and help them with the specifics.

My personal take on the subject is Robo Advisers are basically just a “one-size-fits-all solution”; beware you might find that you get what you paid for.