Robo-Advisors: Investment Sidekicks

Ever feel like investing is too complicated, or hiring a financial advisor is out of reach? Robo-advisors might be your solution. They’re digital platforms designed to help people manage their investments with little to no human involvement – think of it as hiring a “virtual financial planner” that never sleeps!

A Quick History:

The first robo-advisors were actually first launched in 2008, Betterment and Wealthfront leading the way. Both were created with the purpose of assisting the tech industry with financial planning -covering everything from portfolio management to mutual funds. The launch of these two companies allowed clients to reap the benefits of successful financial planning without employing financial advisors. This wasn’t just a big step for techies; it paved the way for everyone to get in on smarter, low-cost investing.

Today's Market:

Fast forward to today, and robo-advisors are everywhere. The industry has exploded! According to Polaris Market, in 2023, the robo advisory market was valued at $7.39 billion (USD). By the end of 2024, this number is projected to rise to more than $9.50 billion, and over $70 billion by 2032. North America is driving this trend, holding over 37% of industry shares – the demand here is intense!

So, what’s the big deal with robo-advisors, and why aren’t they monopolizing the finance world just yet? Let’s dive in.

Benefits of Robo-Advisors:

Let's explore some of the benefits of robo-advisors by comparing them to traditional financial advisors.

1. For small businesses and startups, robo-advisors are low cost-alternatives that can provide the same output (or so they hope...) at a fraction of the cost that would be needed for human labor.

   
   

2. With robo-advisors, your portfolio is available 24/7. All you need is an internet connection, and you’re set. Forget the hassle of scheduling appointments; your investments are literally at your fingertips.

   
   

3. Financial advisors (human ones) usually have a minimum capital requirement to start investing. A lot of robo-advisors, however, offer a minimal or no requirements.

   
   

   • Fun fact: Some human advisors won't take clients with less than $50,000 or sometimes even $100,000 in investable assets!

     
     

4. Let’s be honest – humans aren’t the most time-efficient. With the help of robo-advisors and online brokerage accounts, it's possible to make a transaction within a few clicks.

Limitations of Robo-Advisors:

They aren't perfect, here's where they fall short:

1. Due to current technology capibilities, robo-advisors have been criticized for lacking empathy and emotions (I know, what a shocker).

   
   

2. They offer limited investing options and you might find them lacking if you need services like estate planning and retirement planning.

   
   

3. According to a survey by the Financial Planning Association, 40% of consumers prefer having a combination of human and technological advise, especially during rough times. And, "they wouldn't be comfortable using an automated investing platform during extreme market volatility" (FPA).

   
   

4. Using a robo-advisor means you’re expected to have clear investment goals and a basic understanding of the stock market. They don’t adjust for personal crises or unexpected situations. For instance, a robo-advisor would have difficulty planning if you suddenly lost your job. Therefore, this tool can be quite difficult to operate for some investors, especially beginners.

Can Robo-Advisors Beat the Market?

Let’s tackle the million-dollar question: do robo-advisors outperform the market? In short, no. Here’s why:

1. Passive Investment: Robo-advisors use a "passive" strategy, meaning they invest in a broad selection of assets that mirror the overall market. They’re set up to match the market’s average returns, not beat them. Think of it like being on a boat that’s floating with the river's current rather than trying to speed ahead.

   
   

   • They run on predictive algorithms that use previous stock history to make decisions moving forward. Therefore they can only manage to follow the market, not jump ahead.

2. Lower-Risk: Most robo-advisors aim to manage risk more than maximize returns. They use low-cost funds, like ETFs (exchange-traded funds), to provide safe, steady growth. This is great for long-term investing but not designed to generate higher-than-market returns.

Conclusion:

Robo-advisors are a fantastic tool for anyone looking to build a steady investment portfolio without hefty fees or minimum requirements. They’re especially great for long-term, low-maintenance investing. But when life throws you a curveball, or if you’re hoping to outperform the

market, human expertise still has the upper hand.

So, while robo-advisors are here to stay and will keep growing, a complete takeover of the finance world? Not anytime soon.

Sources:

Louis DeNicola. “Pros and Cons of Robo-Advisors - Experian.” Www.experian.com, 10 Aug. 2022, www.experian.com/blogs/ask-experian/pros-and-cons-of-robo-advisors/.

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“What’s a Robo-Advisor and Is One Right for You? | Vanguard.” Investor.vanguard.com, investor.vanguard.com/investor-resources-education/article/what-is-a-robo-advisor.

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CFI. “Robo-Advisors.” Corporate Finance Institute, corporatefinanceinstitute.com/resources/wealth-management/robo-advisors/.