Introduction
Putting your money has for a long time been an activity that required professional assistance, but with the robo advisors this has changed drastically. These robo advisors have become more common recently as they are depicted as cheap and efficient means through which individuals can invest in equities. With each new wave of new financial technologies there is always the question of whether it is suitable for certain customers or if it can properly act as an effective replacement for traditional financial advisors. In this article, we will be giving a detailed overview of this new practice of robo-advisor both its advantages and disadvantages so that you can make a remarkable decision on whether it is perfect for you.
Pros of Robo Advisors
1. Accessibility and Convenience
Another major benefit of the robo-advisors is their usability. For those individuals who either have minuscule time in their hands or less capital to invest with, these sites offer the best opportunity to kick-start an investment process with less hunt. In fact, you only fill out an 10-15 question survey about your financial objectives, your risk profile and your investment preferences and the robo advisor will then select an investment portfolio for you. This is especially valuable for those that may not necessarily possess the requisite information or lack the self-belief to invest for themselves.
However, there is one more significant advantage of robo-advisors – it is convenience. These are automated, so you can trade from any part of the world, at any time, without having to consult physical financial planner. Here especially working persons or people who are always on the move can utilize this.
2. Lower Fees
Compared to traditional investment services providers, robo-advisors tend to be cheaper. The main advantage of robo advisors is that they don’t need to reach out, hire and pay for human financial advisors so, therefore they impose lower management fees and transactional costs. To give one example, Betterment or Wealthfront, some of the best known robo advisors, even promise as little as $0.25 per year in services. They might consider this much still to be a lot of money, here it’s far less than a traditional financial advisor where people are can actually pay a full 1% or more in annual management fees.
3. We also have automated rebalancing & diversification
Ro-bo advisors also help in rebalancing of the portfolio and diversifying the investment on behalf of the client. Rebalancing seeks to restore a portfolio to achieve the ratio of the risk and diversification that one wants, while diversification means putting your money in different types of investments. These two strategies on their own can be very cumbersome for the average investor to execute on their own and the robo advisors are designed to to constantly keep your portfolio optimised.
4. Tax Efficiency
Another merit of robo-advisors is also that they can retrieve far more tax effective as compare to various other traditional trading sites. This is because their algorithms avoid taxable occurrences such as issuance and recognition of capital gains or sales of assets that will attract taxes. For instance, there are robo-advisors that incorporate tax-loss harvesting for managing and selling of the investment that has incurred a loss in order to help you enhance the tax deduction from the profits that come with other investments.
5. Customization
Indeed, a number of people would agree with the statement that automated platforms are not as personalized but many robo-advisors provide a high level of personalization. These platforms compose questionnaires and solutions to the superannuation planner and financial organization that forms a portfolio that suits your risk tolerance profile and financial objectives. Moreover, the majority of the robo-advisors make adjustments for investor portfolio over time in response to the changing needs and requirements of a client.
Cons of Robo Advisors
1. Limited Human Interaction
Of course, one of the obvious cons of robo-advisors is that they do not imply direct communication with an individual financial advisor. While reading through the terms and conditions of your investments or making inquiries when everything is astir, you are forced to use a chatbot or send an email and not speak to an adviser. This may not really be a big concern for some persons, more so the internet savvy, but there are still those who have a certain loyalty to the kind of advice they want to receive from a human being, particularly a financial expert.
2. Limited Investment Options
Still, robo-advisors are also restricted to offering fewer investment instruments than conventional investment arenas. While a wide variety of trading platforms provide a good selection of exchanged-traded funds (ETFs) as well as mutual funds, they may possibly not be as tailored or have as extensive investment choices as conventional advisors. For instance, if you want equity products such as real estate and private equity investment products, a robo-solution may do not exist.
3. Algorithmic errors risks that AI faces
While robo-advisors do seem to accurately and efficiently execute their functions they are not without flaws or glitches. Like any computerized system, they can be programmer errors, finding a glitch in the algorithm or the software, or a hacker attack. Your investments may be affected by a major mistake or in case of a security compromise. While events of such nature are very rare, it is something you ought to be prepared for when choosing robo advisor.
4. Lack of Human Oversight
The final weakness I found in robo-advisors is that they do not offer human intervention. It is important to understand that although most of the robo-advisors tend to hire professional certified financial advisers, these professionals are not allowed the same close access to manage the portfolio, as traditional financial advisors do. This means that there may be times when you face a financial problem or a life event that needs a human touch and therefore you have to consult a live human financial advisor.
Conclusion
There are so many benefits with robo-advisors in providing affordable stock market investment services for everyone; however, they cannot be the best choice for everybody. If you desire an easy and cheap way of investing that comes with rebalancing and diversification, using a robo-advisor may be the best solution to go for. Nonetheless, if you still want to meet other people, have some special stock picks, or need closer personal attention, you probably would be happiest with face-to-face financial planner. Overall, choosing whether or not to invest with a robo advisor or a financial advisor will vary based on the amount of factors you want to consider, however some of these include your tastes, your requirements, your investment objectives, your circumstances.
