Robo-advisors: what are they?
Robo advisors
Posted by MoneyController on 08.08.2022
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Technology today allows more and more retail investors to approach investments independently. Of course, technology cannot eliminate the inevitable risk component that belongs to every financial investment. However, there are rather sophisticated systems that, on the basis of precise indications, build portfolios and give investment directions. These are robo-advisors. Francesco Lavecchia writes about them on Morningstar, from whose article we report some considerations.
Robo-advisors construct an investment portfolio on the basis of certain important indications. Typically, those who invest through these programmes have to enter the investment time window, return objectives and attitude to risk. Additional information, such as age, may also be requested. As Lavecchia writes, it may happen that younger investors (who are more risk-averse) are suggested portfolios that are more oriented towards equities. Conversely, older investors (like those who are less risk averse) may be suggested more prudent investments, exposed to less volatile assets. Also in the article, Lavecchia points out that robo-advisors often suggest investing in ETFs, i.e. passive funds.
One of the advantages of robo-advisors is the lower cost compared to a live advisor. A Morningstar analysis of a dozen of these programmes shows that the commission charged is around 0.3%. The average commission charged by an advisor is about 1% per year (clearly this does not apply to fee-only advisors, who are paid by fee). The other advantage of these programmes is their ease of use: all you need is a smartphone to access the service. One understands then why many young investors are attracted to these automated forms of investment advice.
Robo-advisors are of course not without flaws. For those with investment objectives that correspond to concrete life goals, a need to preserve assets, and anyone with a low aptitude for risk, robo-advisors could propose investment strategies that are incapable of meeting clients' real needs, including emotional ones. Better therefore, according to Lavecchia, to resort to an advisor in person. In the same article, Lavecchia writes that instead those who are inclined to tolerate a high level of risk might be 'very interested in adopting innovative management solutions such as a robo-advisor'.
Read also:
What are financial investments and how do they work?
How is the risk of an investment determined?
What are ETFs and how do they work?
What is a financial advisor and what types of financial advisor are there?