Ultimate Robo Advisors Hack 2018 | Q&A + Top16
Algorithms play an important part in investment. They are used to trawl and analyze large amounts of data searching for patterns and contexts.
They are also used for self-contained control of industrial robots, and because this picture fits so well, the software for evaluating investment related data was named combining the abbreviation Robo and the term advisor.
In this article you will learn everything about why Robo-Advisors will be indispensable for the future of investment.
What exactly is a Robo-Advisor?
The friendly steely banker greeting customers with whirring servomotors and a truly iron handshake upon entering the bank will probably remain Sci-Fi.
To make the acquaintance of a Robo-Advisor, all you need is a computer with internet access. A Robo-Advisor is an automated investment system based on a special software system.
Traditional investment consultancy typically relies on the experience of professionals investing the funds entrusted to them, based on their knowledge and personal views of the investment market.
However, there is a certain risk of misjudgment involved, and it may also occur that the consultant prefers to include only certain values in the investment portfolio, because they come from the house, thus driving up the advisory and investment costs because of the by appropriate fees.
Besides, manpower is expensive and must be included in the investment.
Basically, the strategies of Robo-Advisors vary depending on the provider in active and passive investment management with different risk level.
For example, in the case of Robo-Advisor active investments, the portfolio may be redeployed into safe-haven securities, such as when a stock market crisis is emerging.
While this generally reduces the expected interest, it also reduces the risk of loss.
Passive strategies maintain the path once taken, although here too the risk is comparatively low due to high diversification.
Both forms of investment include a so-called re-balancing.
As Robo-Advisor investments are typically long-term, the portfolio will be reviewed periodically in accordance with its performance and may be reset to the agreed risk level.
Basically what’s behind the investment strategy of a Robo-Advisor are bare figures linked by conditions, namely algorithms.
The conditions are defined by the customer's answers to questions from the Robo-Advisors that play a part in any investment consultancy.
These data, once converted into corresponding parameters, now represent the space in which the Robo-Advisor or the software moves.
Thus equipped it analyzes data meeting the specifications.
In doing so, the Robo-Advisor accesses gigantic amounts of data, which above all represent the performance of certain investment classes.
Based on this, investment strategies are developed that generally have a high diversification.
To keep this in line with costs, investments are often made in index funds or ETFs, exchange-traded funds.
What are ETFs?
An ETF is an investment fund that is a special asset of the emitting or issuing investment company.
This is an important point in terms of the security of the fund shares. As a special asset, it cannot be claimed by the investment company itself or its creditors, for instance, when the investment company goes bankrupt.
An ETF is basically based on an existing index of an industry, like for example, on a stock index such as the DAX, or even on a real estate index, a bond index or a commodity index.
The index is a variable key figure representing the performance of securities summarized in each industry.
The ETF replicates this index. The advantage for the shareholder in an ETF is that there is virtually no default risk, i.e. total loss, due to its status as a special asset.
Of course, the index value, and thus the value of the ETF, may go down.
But the risk of this happening is much lower than with individual securities.
Depending on the type of ETF, the values of several hundred companies are shown in it or in the underlying index.
Are Robo-Advisors the financial consultants of the future?
Let‘s answer this by a counter-question. Do you get your bearings in traffic using a folded up road map from the glove compartment, or do you entrust the route search to the navigation system?
While navigation devices have been on the market for more than 10 years, the Robo-Advisor is a comparatively new resource for investing in German-speaking countries but well established in the United States.
Of course, navigation devices and investment strategies cannot be compared, but there are parallels to the Robo-Advisor, like the provision and processing of data.
The software of the Robo-Advisor always remains neutral within the scope of the specifications.
A bank adviser or investment consultant may have a "bad" day, to the detriment of their clients. The Robo-Advisor does not know such parameters.
Online asset management by Robo-Advisor is still in its infancy, but with the success already evident and its ease of use, this tool will not only become firmly established, it will also lead many people to rethink their past asset management or the way they are saving.
With a population still affected by the savings book idea despite a zero interest rate policy, the Robo-Advisor may bring about a change. This is mainly because online asset management makes investment in equities, funds and securities accessible for everyone due to relatively low entry and service costs.
This also applies to people whose savings and income were not a target for classic investment consultancies due to their relatively low value.
What are the advantages of Robo-Advisors?
"What does it cost?" A frequently heard question, and rightly so.
In the case of online asset management by a Robo-Advisor, the annual costs, depending on the provider, amount to a half to two percent of the invested amount.
This is more than when investing on one’s own, for example, in fixed deposits or call money, but far less than the fee for freelance consultants or the commission and termination fees for products of the house bank.
Online asset management should of course pay off or provide a proper interest.
It must be kept in mind that interest rates are linked to the amount of money managed by the services.
New providers must first build up a capital stock.
On average, the previously recorded performance figures can easily keep up with traditional investments, and at lower costs.
A summary of the advantages in brief:
- 1High time savings
- 2Low minimum deposits
- 3Cost effective
- 4Low administration costs
- 5Instant overview via app
- 6Investment decisions according to evaluation, not based on feeling
- 7Broad diversification and thus lower risk
Certainly a major advantage is the uncomplicated entry via the respective online portal of the provider.
This saves not only the way to the house bank or to a paid consultant, it also offers the opportunity to compare.
And gathering more information and references about the selected provider makes sense.
Top 16 Robo-Advisors
- Schwab Intelligent Portfolios
- TD Ameritrade Essential Portfolios
- Vanguard Personal Advisor Services
- Personal Capital
- Fidelity Go
- BlackRock Future Advisor
- Merrill Edge Guided Investing
- Ally Invest Advisors
- Asset Builder
What are the disadvantages of Robo-Advisors?
The so-called advisory liability is a legal requirement for investment consultancies in some countries. However, there are pitfalls.
Not all Robo-Advisors are subject to this rule, because not all are actually asset managers, but only financial investment brokers in accordance with § 34f of the Industrial Code.
Other disadvantages are:
- No long-term statement on the performance yet
- Quick response to crisis situations only with active management
Real crisis situations such as a sudden stock market crash are fortunately rare events and they affect the respective portfolio differently.
This depends mainly on the risk level according to which the money has been invested.
How are client funds secured with a Robo-Advisor?
As already described in the brief summaries, customer deposits are not deposited directly with the companies but with various banks.
There, the funds are managed as a deposit and are subject to deposit insurance as special assets.
This means that even in case of bankruptcy of both, the bank and the investment company, the funds are protected from access by third parties.
Conclusion on the future of investing with a Robo-Advisor
The very term asset management possessed and possesses somewhat elitist connotations, intended only for a small, privileged group.
Thanks to the tool of Robo-Advisors asset management can move out of this corner.
Thus, asset management now becomes a matter of fact for the large group of those who prefer to invest their hard-earned money in such a way that it pays reasonable interest without running the risk of losing all.
Another important point is that providers use ETFs as an investment. These can be calculated excellently by means of Robo-Advisor, making investing not too expensive as well as secure.
At the same time, performance can be easily observed, depending on the provider even by phone.
The savings account has not been profitable for a long time now, slowly consuming the money deposited in it.
Investing your own money yourself takes time and requires specialist knowledge.
The Robo-Advisor. The friendly software for present and future investment.
Further reading: Artificial Intelligence based Investing