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Are Robo-Advisors Worth Using?

Are Robo-Advisors Worth Using?

What Is a Robo-Advisor? 

If you’re considering getting into investing and trading, there’s a chance you may have come across an interesting new niche in robo-advising. As the name suggests, there’s certainly a type of ‘robot’ involved – but what is a robo-advisor, and how could using one help to boost your portfolio returns?

Automated Investment Managers

A robo-advisor is an automated program or algorithm that invests on your behalf. What’s more, it does so without the need for any kind of human control. For example, a stock trading app may present a robo-advisor to help new traders make smarter, more sustainable investments for the months and years ahead. 

In some cases, robo-advisors get to know you based on a short questionnaire or two, or through your ongoing attitude to financial risk. With trading and investment services that offer bond and stock splits, for example, a robo-advisor can determine which direction you’re most likely to lean into. Are you after quick wins, or prefer long-term growth?

In many ways, the robo-advisor boom is linked to a growing preference for passive investing. This is where you’d buy a bundle of stocks or shares – such as an ETF – based on market trends over long periods. It’s a slow, steady way to build income, rather than claiming quick profits as soon as they arise. 

Robo-advisors will also build automated profiles for you based on how long you wish to save for, or when you wish to ‘cash out’. Essentially, your robo-advisor monitors the markets for you, and makes choices it believes you’d prefer. 

a drawing of an artificial intelligence eye

What Are the Benefits of Using Robo-Advisors? 

Robo-advisors are great for taking ‘emotional investing’ out of the picture. This type of investing occurs when, for example, you witness a sharp peak or a sudden dip. In these circumstances, emotional investors may choose to suddenly invest more money, or sell their shares, based on thrill or fear respectively. 

With a robo-advisor, portfolio decisions are made – funnily enough – robotically. There’s no risk of a robo-advisor following an emotional train of thought. With many trading platforms, you can fine-tune your advisor so that there are limits to what it can and can’t buy or sell. You have, arguably, more control over what you invest in by delegating to artificial intelligence! 

There’s also cost savings, too. Robo-advisors usually provide decision-making and insight at a fraction of the cost of human advisors, or do so as the ‘default option’ through several trading apps. If you are new to investing or trading, robo-advisors could save you a lot of money on immediate fees. 

In fact, robo-advising is ideal for newbie traders, simply because there’s no need for you to get too deep into the markets right away. By setting simple parameters and limits for your advisor when just starting out, you have a small safety net that can start building money for you. This could give you extra time to start looking into how to trade without robo-advice, and how to better tune your advisor should you wish to take more risks. 

The bottom line, then, is that robo-advice is provably cheaper from the outset, it’s great for new traders learning the ropes, and it takes away those often dangerous emotional moments where buying and/or selling may not be worthwhile. However, as with all trading tools and platforms, there are a few drawbacks to keep in mind, too. 

a robot arm and human arm nearly touching

What Are the Drawbacks to Using Robo-Advisors?

The biggest drawback for many people looking into robo-advisors is limitation. Some apps and services may restrict robo-advice to strict parameters, requiring caps on buying and selling. Meanwhile, you are effectively trusting a machine to determine your risk profile and trading attitude. This, as expected, may not appeal to everyone – especially those who already have a few years on the market under their belts. 

There’s also the lack of human interaction. While robo-advisors are provably helpful in building and growing portfolios for various profiles and means, they are not at a level of intelligence many people might expect. You are effectively placing your trading and investments on auto-pilot, meaning that while there may not be many risks involved, you’re still restricted to whatever the robot wants to do. 

Human insight can be crucial when it comes to investments and portfolio growth. AI, for all it is growing in capability, is still a long way from understanding context (on par with the human brain). Investors and traders can also communicate clearly with human advisors, meaning there’s ample opportunity for tweaks to their strategies. With robo-advisors, you’re, as mentioned, quite restricted as to what you can and can’t expect your robot to do. That can be a big turn-off for many investors. Robo-advisors may be efficient, but they don’t always provide the answers or insight we demand. 

Are Robo-Advisors Right for Me?

As with any investment or trading platform or software, it always pays to research your market. Robo-advice will vary from app to app, meaning it’s a good idea to read reviews and insights into how specific AI works, and how much you can control it. 

Be sure to check details such as minimum investment expectations, fees, regulations, and whether or not you can still access human support and advice if you need it. Look for endorsements in your prospective robo-advisor, too. Is it well-rated by industry-leading analysts and reviewers? Does it offer the features and protection you require? 

Ultimately, robo-advisors have an important place in trading and investment in the here and now. They will continue to develop and improve as the years go by – and for now, there’s plenty of reasons why choosing one might make sense for your financial goals. However, as always, tread carefully – read reviews, compare services and rates, and be ready to rely on human advice, too, when you need it the most. 

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