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Traders Workshop

Robo Advisors Shape the Future of Portfolio Management

Stock-Markets / Investing 2017 Jul 04, 2017 - 06:34 PM GMT

By: Boris_Dzhingarov


The rapid advance of technology has changed the world, and has created a complex financial marketplace. In this new, fast-paced ecosystem, it is important for investors to keep up to date on current trends and asset management best practices.  Some advisors suggest that the investment strategies of old do not work anymore, and that traders can find better ways to spend their capital.

One growing tendency in today’s financial world is the use of robo advisors to analyze and manage investor portfolios. These new services enable traders to automate their research and management processes.Companies that offer this technology hope to replicate human financial advisors, and make more money for their customers.

Robo advisor services are a great tool to passively manage small and medium-sized portfolios, and are becoming more prevalent in the financial world. Thus, traders can greatly benefit from understanding what these services are, what they do, and how they could add totheir bottom line.

Robo Advisers Grow in Popularity

Following the launch of the first robo advisor software Betterment in 2008, the use of these tools in the financial world has grown significantly. Since then, more investors and companies have made the switch to robo advisor services, and more pursue it witheach passing year.  Today, robo advisors are a legitimate and reputable way to manage one’s portfolio.

Robo advisors are applications which use algorithms to analyze the market and a user's investment portfolio. These services give investors an affordable means to automate their portfolio and investment management. For many customers, it can even replace the need for human financial advisors.

Searching for robo advisors comparison and reviews reveals a host of firms offering different solutions for varying demographics. The most widely used standalone platforms are Betterment, Wealthfront, and PersonalCapital.  However, many traditional asset management companies such as Goldman Sachs, Charles Schwab, and Vanguard have taken note and embraced the technology, announcing plans for their own robo advisor platforms.

The use of robo advisors is growing consistently. According to BI Intelligence, by 2020 roughly 10% of all global assets under management—approximately $8 trillion—will be run by robo advisory programs services worldwide.

How Do Robo Advisors Work?

Robo advisors act as a financial consultant, and almost completely replace the need for human intervention when managing portfolios. By utilizing complex algorithms that can analyze market trends and compare them with a trader’s portfolio, robo advisors can automate the process of investment management.

Each robo advisor service is tailored to individual traders, operating on personal information provided by each customer.  This can include a customer's future investing goals, along with their past and present financial situation. With this information, a robo advisor will assess their risk tolerance, suggest the most appropriate stock portfolio, offer financial recommendations, and make automatic investments tailor-made to each client.

Robo advisor companies can earn their investors more money over time by simplifying complex and sophisticated trading techniques. One such technique, tax loss harvesting,  involves selling an asset that has lost value in order to reduce the tax hit on income made through other investments. This method outperforms tax-deferred investment plans, earning the customer more capital in the long run.  Many robo advisor platforms incorporate this strategy and others like it to maximize customers’ earnings without increasing their risk exposure.

Are They Worth the Risk?

As with any innovative technology, there are often associated risks or concerns.  For experienced investors, the lack of human intervention can seem off-putting.  Many are doubtful of how a robo advisor might behave in the case of a financial crisis.  Since robo advisors have only become available to the public after the “Great Recession”, skeptics have no real reference point to compare. 

While some still appreciate the human touch and the ability to meet face-to-face, that robo advisors remove this need is a selling point to many. Younger, tech-savvy investors and those new to trading tend to be wary of hiring a financial advisor.  They prefer access to 24/7 financial advice across multiple devices, which is available only with a robo advisor.

Furthermore, the flexibility and low cost of robo advisement has opened the door to a whole new demographic of potential investors who previously viewed financial investing as something available for the affluent and well-off. Standalone robo advisors are generally available for under 1% of assets under management, and often eliminate the requirement of a minimum sum of money per account. This is in heavy contrast to the commissions sometimes charged by human advisors.

For those interested in the simplicity and flexibility of a robo advisor, it is certainly a trend to explore. Those still skeptical relying on a computer for their finances should pursue one of many hybrid options- which combine the services of having a computer and human advisor simultaneously.

By Boris Dzhingarov

© 2017 Copyright Boris Dzhingarov - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2017 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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