What Is A Robo-Adviser? How Does It Work?

By Saroni Chakravarti | March 13, 2019

Because of their low cost and convenience, robo-advisers are fast becoming the preferred medium of investing for many investors. Let’s find out more about them.

Robots may have been accused of posing a threat to the human workforce and given rise to trepidations about them taking over our jobs. However, not everything about robots and automation is dystopian in nature.

Given the current scenario in India where most investors have low access to quality financial services and there are fewer than 5,000 professional advisers meeting the growing need for personalised financial advisery*, the middle and upper middle class who can’t afford the professional services of wealth management companies or even ‘mom and pop’ financial advisers are left to their own devices. Robo-advisers are addressing this problem and at a fraction of the cost.

How Do Robo-Advisers Work?

A robo-adviser uses computer algorithms or advanced online software to create and build your investment portfolio. Robo-advisers are nothing but online wealth management companies that use crucial details like your age, income, investment timeframe, investible amount and risk profile to create the right portfolio for you.

The services could range from an automatic rebalancing of your portfolio to tax optimisation. Robo-advisers are a viable option for investors who can’t afford or do not want to hire a financial adviser. A mathematical equation determines your risk profile (high or low) based on the inputs that you give and offers you ‘customised’ investment advice on where to invest.

Additional Reading: A Step-By-Step Guide To Making Your First P2P Investment

Once you’ve invested in Mutual Fund schemes based on the robo-adviser’s suggestion, on an ongoing basis, this software will automatically make changes to your portfolio or re-align your portfolio to suit your target allocation.

Benefits Of Using A Robo-Adviser:

One of the biggest advantages that robo-advisers have over other traditional mediums of investment is that they are way more affordable and don’t involve hefty fees. Most investors who are starting out on their investment journey are easily influenced by market highs and lows and let their emotions dictate their investment decisions.

Since robo-advisers are computer algorithms, they don’t make these kinds of mistakes. Another advantage of robo-advisers is that they are really convenient and make your life easier. Once you’ve started your investment journey, you don’t have to check in every now and then to see if your portfolio needs rebalancing or if you need to change your fund allocation.

A robo-adviser will do that for you and you won’t have to worry about dubious financial advisers mis-selling spurious financial products to you.

Additional Reading: Popular Fixed Deposits for NRIs

Who Robo-Advisors Are Best For:

There is a split in opinion about whom robo-advisers are best suited for. While some financial experts are of the opinion that robo-advisers are best for those who are just starting out on their investment journey, some are of the opinion that it should only be used by those investors who are well-versed with financial products and understand the risks of investing. Robo-advisers are also well-suited for investors who have a low asset-size.

What Kind Of Investments Are Used By Robo-Advisors?

Usually, most robo-advisers use Mutual Funds or exchange-traded funds to build your portfolio. Other services offered by robo-advisers include regular rebalancing of your portfolio, either automatically or at regular intervals. Since this is done using a computer algorithm, it ensures that your portfolio doesn’t deviate from its original allocation. Robo-advisers offer other kinds of services as well like financial planning tools such as retirement calculators.

Additional Reading: Why Is It Crucial To Diversify Your Investment Portfolio?

What You Should Know About Robo-Advisers:

Financial planning is a complex process that involves not just investing but includes other aspects as well like tax optimisation, estate planning, insurance etc. A robo-adviser may be able to handhold you through your investment journey but it may not be able to advise you on other aspects of your planning.

While some robo-advisers offer you live assistance, some will interact with you almost exclusively through the web. If you have trepidations about making financial decisions sans any human connect and solely based on mechanical mathematical calculations, then robo-advising may not be right for you.

If you prefer making investment decisions based on interactions with someone you’re familiar with and who understands your needs well, a traditional financial adviser should be your best bet as long as they aren’t trying to cut corners for their own profit or pushing financial products to you that you may never need.

Not too sure if you want to start your investment journey with Mutual Funds? Why not opt for Fixed Deposits? Rates go as high as 8.65%.

*Source: The Economic Times

 

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