Investing can often seem complicated and scary. But what if we told you that there is an easy way to create a low-cost, globally diversified and professionally managed portfolio of investments? The secret: Robo-advice.
Robo-advice is a new buzzword that describes how people get financial advice and invest using online, automated technologies. Robo-advice doesn't actually involve mechanical robots, which is probably a bit disappointing for some Star Wars fans. Instead, robo-advisors utilise algorithms (which are basically just automated processes) and other technologies to drive their investment services.
You might not realise but we all use and rely on algorithms and automated technologies in almost all aspects of our daily lives. These technologies are at the heart of all our devices – our phones and computers, our traffic lights and even our toasters. They even help people find social partners, and will soon help power driverless cars. So it's not surprising that the same underling technology is now being harnessed to help people invest and manage their money.
How “robots” can help you become a better investor.
- Robots have humans helping out behind the scenes: Robo-advice doesn't completely kick humans out of the equation. Advisory Boards and investment committees still make crucial decisions about how the “robot” invests and manages your money. Educational material, expert market insights, live chat and phone support at a minimum also provide a human element to some robo-advice services.
- Robots are inexpensive: Wealth managers and financial advisors can be expensive, so that's why we suggest using technology to help automate the parts of the process that don’t require costly human intervention. With less people to pay, robo-advice firms can transfer those savings to you.
- Robots don’t require you to have $250,000 to open an account: Hiring a financial advisor could mean you need assets of at least $250,000 (and usually much more) to access their services. This makes investment management feel like an elite club. Robo-advice opens the playing field to all investors.
- Robots are pretty smart: Robo-advisors use many of the same resources and processes as human financial planners in terms of portfolio management but are able to deploy these services more efficiently and consistently. Billions of dollars are now managed by robo-advisors around the world and that figure is growing rapidly.
- Robots can control their emotions: There’s plenty of evidence that when people let emotions drive their investment approach, they typically make poor decisions – like “panic selling” when markets drop only to buy in again after prices have recovered (sell low/buy high?). For long-term investors, patience and smart portfolio management are much more important than fear and panic driven decisions. Robots stick to the rules that have been shown to help eliminate poor, emotion-driven investor decisions.
- Robots can simplify things, and be highly accessible online: By using online and automated processes, a robo-advisor can simplify and enhance the task of establishing and monitoring your investment portfolio. This can eliminate the typical stresses that come with trying to build your wealth and also free up time for you to do the things you want to do.
- Technology enables an awesome user experience: Ever been frustrated because you’re not really sure what investments you own, or how they’ve performed? Robots can provide 24/7 simple and elegant user interfaces that provide clear reporting and simple analytics with your investments. No more “once a quarter” or highly confusing emails or letters.
Technology is changing the world in many ways. Now, it’s also changing how investors, large and small, can set up a professionalised investment plan and have better control (at a cheaper price!) of their financial lives. Don’t fear the robots, they can be pretty helpful when you consider most of the alternatives.