What is a Robo-Advisor and How Does it Function?

What is a robo-advisor?

Innovative technologies are constantly transforming the way the financial services industry advances and performs, and robo-advisors are one of those modern technologies that have been changing the investment sector for the better.

A robo-advisor is an online financial platform that uses computer algorithms to provide customized financial advisory and wealth management services, with the click of a button and minimal human interaction. The digital technology is proficient in analyzing data, distinguishing trends, and forecasting. Essentially, robo-advisory services make financial planning easier overall.  

Robo-advisors have been making a global impact for over a decade, but recently gained more popularity due to millennials, Gen Z, and the Coronavirus pandemic. Recent studies also show that “the robo-advisory industry is expected to grow to $1.2 trillion by 2024.”

How do robo-advisors work?

Although every robo-advisor business is unique, they usually operate in the same manner. Clients will have to create an account and undergo some type of digital onboarding process. This electronic process will include a comprehensive questionnaire that will consist of detailed questions pertaining to the clients' financial goals, investment timeframes, and risk tolerance.  

Once the assessment is completed, the digital service will process the information and use complex algorithms to create a curated investment portfolio. This portfolio is rebalanced frequently, and clients can easily change their financial values and risk tolerance at any time.

After the initial screening is finished, your computerized financial consultant will safely manage and monitor your investment portfolio and provide you with the best financial advice and strategies. Getting started with a robo-advisor is a quick, straightforward process that takes less than 15 minutes.  

History of robo-advisors

The idea of robo-advisors came to life in 2008, right around the time of the global financial crisis. And the very first platforms to launch were Betterment and Wealthfront, two automated investing platforms that are still thriving and competing today.

The robo-advisor market has also made an impression on large firms in recent years. In 2015 the well-known firm, Charles Schwab, started its own robo-advisory service. And since then, more popular financial institutions such as Wells Fargo, Bank of America, and Citizens Bank, have launched their own online advisory and investment platforms.  

Benefits of using robo-advisors

• Low signup costs and fees
• Easy online access and user-friendly  
• Automated portfolio rebalances
• No emotional based decisions
• Limited human interaction
• True diversification
• Build long-term wealth

There are several pros to using this type of artificial intelligence, but one of the top benefits is related to costs. Robo-advisors are more affordable than traditional human consultants. For instance, the average robo-advisory platform charges between .25% to .35%, while the traditional human advisor charges an average of 1%, almost four times as much!

The second major benefit of using the digital advisor is the element of no human interaction, an aspect many investors find appealing. This cutting-edge technology gives you the option to manage your money without setting up an appointment or meeting face-to-face with a human advisor.  

Disadvantages of using robo-advisors

• Limited personalization
• Restricted contact methods
• No person-to-person meetings
• Loss of client relationship
• Limited flexibility

There are a few downsides to using robo-advisors. If you’re one of those individuals who genuinely enjoy meeting face-to-face, and feel more comfortable discussing financial matters this way, then this technology is probably not for you. Using a robo-advisor eliminates that potential client relationship and the opportunity for personal advice.  

Another drawback to using this technology are the limited personalization and flexibility aspects. Robo-advisors were designed with the masses in mind, meaning you’re going to receive a financial plan that is based on your questionnaire and profile, and “there is only a limited amount of goals and requirements of the individual that the machine can take into consideration.”

Tips for finding the best robo-advisor

• Understand management fees
• Compare account minimums
• Check for promotions
• Consider account types
• Are hybrid services offered
• Customer support options

There are a few factors you should consider before selecting a robo-advisory service that best fits your needs. When evaluating services, make sure you consider all signup costs, management fees, and the minimum investment amount.  

Explore the exact services each digital advisor is offering. Some platforms may offer additional features such as tax-loss harvesting or other limited time promotions.  

And investigate the type of customer support services and solutions each platform offers. Choosing a robo-advisor that has sufficient contact methods and a solid support system is always a smart idea.

Where to access quality data for your robo-advisor business

Are you running a robo-advisory service and need quality financial data? If so, please reach out to us today to find out how we can power your digital business. Intrinio works with several robo-advisor platforms and supplies the financial data your specific market needs. Our robo-advisor clients specifically leverage our fundamental data, along with our market data, for a multitude of business reasons. And when you partner with us, you can expect high-quality data, reliable tools and resources, and premium customer support. Explore our data packages or request a consultation and one of our data experts will contact you shortly.