Charlie Barton is a publisher at Finder. He specialises in banking and investments products, including banking apps, current accounts, share-dealing platforms and stocks and shares ISAs. Charlie has a first-class degree from the London School of Economics, and in his spare time enjoys long walks on the beach.
Science-fiction writers have long been predicting that robots will take over the world, and those predictions could soon come true in the lucrative investment advice market.
Recent years have seen the emergence of digital financial advisers – known as robo advisers – which take advantage of modern technology to offer low-cost investment management services. In this guide we explain how these robo advisers work and how can you compare the services offered by different providers.
What is a robo adviser?
A robo adviser performs many of the same services as a traditional financial adviser. Using complex algorithms and technology, these digital advisers provide financial plans to consumers and automatically manage their investments. The basic operation of these automated financial advice services is quite simple.
Once you provide details of your investment goals, investment timeframe and appetite for risk, the robo advice service generates a recommended investment portfolio, which is usually based on exchange traded funds (ETFs). Once you’ve invested your money, the robo adviser manages your portfolio and re-balances it whenever necessary to ensure it remains in line with your risk tolerance levels.
Proponents of robo advisers say that instead of being influenced by emotion when making trades, digital advisers use algorithms and mathematical models to determine the right asset allocations for investors. They’re also much cheaper than having a traditional financial adviser actively manage your investments, with robo advice available for as little as one-tenth of the cost of receiving advice the old-fashioned way.
Digital advice services are based more on building and maintaining a portfolio than providing strategic advice, so most analysts predict that there will still be a place for traditional financial advisers in the future – in fact, the advantages the technology presents could be very useful tools for financial advisers. However, for the 80% of the population who either cannot afford or are unwilling to pay the fees to receive traditional financial advice, robo advisers offer a convenient and affordable alternative.