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
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
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.
Founder & CEO, ALGOINSIGHTS PTE LTD