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Fintech Fridays: Robo Advisory

What is Robo Advisory?​ Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services to build and maintain financial portfolios with minimum human intervention. This means that there is little need for any human professionals for financial and asset management advice, thus reducing service costs to flat flees of less than 0.5% per specific amount managed, as opposed to 1% to 2% charged by traditional financial advisory. In particular, some of the perks of Robo advisor offer easy account setup, robust goal planning, account services, and portfolio management. It also offers security features, customer service, comprehensive education, and low fees. The working mechanism behind robo-advisors is straightforward. To access its service, one only needs to complete questionnaires designed to assess their attitude to risk. For example, an investor is expected to provide their risk tolerance, time horizon, and investing goals to be recommended with a portfolio comprising of low-cost ETFs that are managed and rebalanced as needed. Advantages and disadvantages of Robo Advisors Some of the advantages to Robo-advisors comprise of its ease of access, efficiency and independent indexing strategy. Robo-advisors are widely accessible in the sense that one can use them throughout the day as long as they have an internet connection. Added to this is the minimum assets one needs to register for an account ranging from $3000 to $5000 as the standard baseline. Some of them even require no account minimum for standard offering. Efficiency is also key to Robo-advisors as online platforms because there is no need to call or meet a financial advisor for them to execute your trades. With Robo-advisors, an investor can just use the service whenever and wherever they want. Lastly, indexing strategy is conducted by robo-advisors such that investors can bypass the mundane process of choosing funds, stocks or ETFs for investment only to be given poor results by the market. Nor do they have to possess specialized knowledge of stock markets or balance sheets before investing. Robo-advisors do all the work with even greater results. That said, robo-advisors are not without their drawbacks. One might prefer to decide about their investment choices on their own which is not possible in this instance as robo-advisors mainly invest in cheap ETFs and index mutual funds. And obviously, robo-advisors are inferior to theirl human counterparts in the sense that we can not look to them for financial counselling of long-term goals or explanation of investment strategy.

Example of a Robo Advisor​

One example of a large robo-advisor is Betterment which offers digital investment management and financial advisors. In fact, it is the first-advisor to be launched back in 2008 with the purpose of rebalancing assets within target-date funds. What sets Betterment apart from other platforms is its unique offering of opportunities for clients to directly chat and receive answers from a human financial advisor. In addition, it constantly releases new financial products to better serve clients with low-cost packages and a high yield-savings account. Betterment’s acquisition of Makara in 2022 marks its movement into crypto that is expected to increase its asset management value, which already sit at $26.8 billion at the time.

The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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