Robo-Advisors

Those who want to prof­itably invest their money these days can find numerous online advisors, finance blogs, and YouTube channels that provide necessary back­ground knowledge and in-depth in­for­ma­tion for a suitable in­vest­ment strategy. With the robo-advisor in 2013, a new system came onto the market for the first time that would not only give in­di­vid­u­als tips with regard to exchange-traded funds, but also take over the entire asset man­age­ment process according to the user’s wishes. But how exactly does this modern type of financial man­age­ment work? And which dif­fer­ences are there between the in­di­vid­ual providers?

The term “robo-advisor” combines robot and advisor to represent a number of companies in the financial tech­nol­o­gy sector (so-called FinTech firms) that digitize the classic services of financial advisors. These special online platforms are used to help private investors put together a portfolio of in­vest­ment products to be au­to­mat­i­cal­ly monitored by al­go­rithms and modified following de­vel­op­ments in the financial market. The term “robo-advisor” is used both for the re­spec­tive provider and the platform.

Oc­ca­sion­al­ly, the robo-advisor will also au­to­mat­i­cal­ly take over the re­bal­anc­ing of in­vest­ments. It’s not uncommon for the portfolio to change, for example, due to fluc­tu­a­tions in the value of in­di­vid­ual positions, i.e. funds deviating from the original strategy. Positions whose values have greatly increased over time then have to be sold pro­por­tion­ate­ly. Positions that have lost value, on the other hand, have to be purchased pro­por­tion­ate­ly. In this way, the original risk-return profile is restored according to the desired in­vest­ment strategy. The robo-advisor brings the portfolio back into the correct balance.

The al­go­rith­mic asset man­age­ment offers various benefits. Which features in­di­vid­ual private investors profit from depends on which type of robo-advisor they use. A dis­tinc­tion is made between full-service, half-service, and self-service systems.

Full-service robo-advisor

The full-service robo-advisor takes cares of all aspects of the financial in­vest­ment. It suggests an in­vest­ment strategy to the investor, takes over the complete asset man­age­ment, and in­de­pen­dent­ly takes care of the re­bal­anc­ing to restore the original in­vest­ment structure, if necessary. Serious full-service robo-advisors are generally reg­is­tered as in­vest­ment advisors with state se­cu­ri­ties au­thor­i­ties or federally with the SEC, and are required to adhere to all of the same security laws levied on all reg­is­tered advisors. This allows the robo-advisor to manage your assets in much the same way as a human advisor would.

Half-service robo-advisor

As the name suggests, this robo-advisor offers a limited service. It acts as a broker for its customers, procuring in­vest­ment products as part of an in­vest­ment strategy, but as soon as the in­vest­ment structure has to be adjusted (re­bal­anc­ing) it requires the approval of the customer. So if you use a half-service robo-advisor, you’re not entirely giving up the man­age­ment of your in­vest­ments.

Self-service robo-advisor

The self-service robo-advisor can be regarded as a kind of guide. It only gives the investor tips on the topic of financial in­vest­ment. The investor has to do all of the asset man­age­ment (opening se­cu­ri­ties accounts, purchases, sales, re­bal­anc­ing) on their own.

In principle, a robo-advisor is suitable for anyone who wants to logically invest money for the long-term and needs pro­fes­sion­al support for their in­vest­ment decisions. If you want to use virtual asset man­age­ment, you should have some back­ground knowledge on the topic of funds so that you can better evaluate the in­vest­ment proposals. Compared to self-ad­min­is­tered man­age­ment, though, investors don’t have to spend as much energy dealing with in­di­vid­ual scenarios and the follow-up decisions them­selves. A full-service robo-advisor decides for itself what’s best for the in­vest­ment structure, and au­to­mat­i­cal­ly carries out re­bal­anc­ing during the entire in­vest­ment period.

If you want to make a profit in the capital market, you should make long-term in­vest­ments. The same goes for investors that use a robo-advisor and al­go­rith­mic in­vest­ment strate­gies. For example, if you want to invest your yearly bonus for one year only, then you would be better off con­sid­er­ing other al­ter­na­tives. A robo-advisor is primarily suitable for long-term asset building.

Automated asset man­age­ment is suitable, though, for those who tend to make emotional decisions when investing money. In the event of price fluc­tu­a­tions, for example, shares are often sold off too quickly for fear of losses. Computer programs, on the other hand, make decisions on the basis of key figures without any emotions and offer dynamic risk man­age­ment at the same time to stabilize the in­vest­ment strategy.

Robo-advisors shouldn’t be the first choice for investors with short-term in­vest­ment goals. Even though the portfolio can be ter­mi­nat­ed at any time, and the invested assets will be released, the risk of a loss of value could also increase, since there’s no longer extra time for it to be com­pen­sat­ed. Compared to a robo-advisor, a classic financial advisor can much better meet the needs of investors who want to invest in the short-term, and can develop the optimal in­vest­ment strategy according to their in­di­vid­ual ideas.

Spec­u­la­tive investors, as well, are not well advised by the virtual asset man­age­ment. These are people who prefer to invest money in the short-term and at high risk. Of course, the robo-advisor can’t work without any will­ing­ness to take risks – after all, the compiled portfolio includes funds that are subject to fluc­tu­a­tions in value. These can’t always be reliably foreseen by al­go­rithms.

Investing in ETFs also gives small investors the op­por­tu­ni­ty to invest in a broad range of markets and operate sys­tem­at­ic asset formation. Because index funds are passively managed, the costs as well as the required effort are com­par­a­tive­ly low.

Due to its passive man­age­ment (in the case of most providers), a robo-advisor is con­sid­ered a com­par­a­tive­ly low-cost option for asset man­age­ment. The overall cost for the investor, however, depends on the range of service (full- or half-service) as well as the re­spec­tive provider.

Some providers charge a yearly man­age­ment fee cal­cu­lat­ed depending on the investor’s fixed assets. Others focus on the average volume per year – the fee is the cal­cu­lat­ed monthly, quarterly, or yearly. Since the fees vary strongly between providers, a thorough com­par­i­son of robo-advisors be­fore­hand is in­dis­pens­able. You can find a direct cost com­par­i­son of the five most popular providers in the US at the end of the article.

Various com­par­i­son portals (such as RoboAd­vi­sors, which looks at the merits of various robo-advisors), online platforms (such as Nerd­Wal­let, which provides customers with tips and tools for effective investing), and financial magazines (such as Mon­ey­Sense, which reports on the latest de­vel­op­ments in financial planning) regularly examine providers of digital asset man­age­ment. The robo-advisor com­par­isons show how the offers differ in terms of minimum in­vest­ment, fees, and portfolio com­po­si­tion. We’ve clearly compiled the most important facts for five of the most popular providers in the USA for you here.