To Robo or Not to Robo?

Algoinsights Blog

Can the use of a Robo-Adviser help you plan your investment portfolio? I think Robo-Adviser is an interesting thing that has recently been added to the investment universe. As per any technology disruption, Robo-Adviser technology has replaced many human advisers in the process. Similarly, automatic trading algorithms have replaced most of the floor traders since 2009 and it is increasing at a rate of 11.1% CAGR annually.

In this article, I would like to talk about the 5 pros and cons of using Robo-Adviser for your investment portfolio selection. Again, these are my opinions and you are free to agree or disagree.

Pros of Using Robo-Adviser

  1. Low-Cost

Cost is the most important element in your investment portfolio. The lower the cost, the higher your investment returns. This is due to the absence of the middleman – the human adviser.

  • 24 Hours Availability

It is an online platform. You only need a reliable internet connection. You need not worry about the “disappearance” of your human adviser whenever you need them for some answers.

  • Wide Range of Products

The Robo-Adviser is linked up with many product suppliers to serve you. However, having more products may not necessarily be a good thing in my opinion. It may confuse you and make you like a lost sheep in the investment jungle.

  • No Bias Product Recommendation

Robo-Adviser is neutral in its product recommendations. Their product recommendations are based on your answers to their questionnaire. On the flip side, for the human advisers, they have what I call as a human bias, they will sell you products that give them the highest commission payout and these products may or may not even fit your needs. Their need for a high commission payout is against you.  

  • Low Entry Levels

With a few thousand dollars, you can start your investing journey.

Cons of Using Robo-Adviser

  1. Impersonal

There is no personal relationship to talk about with a Robo-Adviser. It cannot answer your questions like a human advisor would. This can be a stumbling block to those who have a lot of questions but no answers.

  • Fixed Algorithms

Based on your answers to their questionnaire, the Robo-Adviser will churn out your “solution” which is a set of fixed algorithms entered into the system based on the programmers’ bias. Here you may have a problem at hand with Robo-Adviser – another form of human bias. You are expected to “take it or leave it.”

  • False Assumptions

Robo-Adviser expects you to have a certain knowledge of your asset classes. In reality, most people who use the services of a Robo-Adviser have limited or no knowledge of investment or asset classes at all. 

  • One-Size Solution

In most cases, Robo-Adviser technologies are focused on investment planning and retirement planning. It only offers similar solutions for similar needs. But when you have a goal to build an emergency fund or pay down your debt, the Robo-Advise cannot help you. This is where I think a human adviser can add value that no Robo-Adviser can.

  • Hidden Fees

Watch out for any hidden recurring fees. These fees come in the form of a subscription, membership, or platform usage. They can eat up all your investment return and then some.

Should You Use a Robo-Adviser?

I have just mentioned the pros and cons of using the services of a Robo-Adviser. Whether you should use it or not, it is entirely up to you. No one can answer that question for you.

But for myself, I believe in DIY my investment portfolios. As you will read in my upcoming book – 12 Fundamental Truths for Financial Wellbeing. You will realize that investing is simple if not simpler.

Thank you for reading this article.

Great wealth to all.

Victor Ang

Founder & CEO, ALGOINSIGHTS PTE LTD