Since 2008, it is possible to build and manage a stock market portfolio in an automated way! This generation of trading robots appeared in the United States and is submerging the financial sector. What do we think of this innovative management tool? Can we trust robo-advisors? To clarify your questions, here is an article that presents this tool as well as the advantages and disadvantages of this technology.
What is a robo-advisor?
The robo-advisor is a platform for financial investment advice. This digital tool is based on a mathematical algorithm that takes into consideration a considerable amount of information, such as the financial market, the local and global economy, the investor profile, etc. When you want to invest, the robo-advisor acts as a digital financial advisor and will make financial investments adapted to your situation.
Although this technology is not that innovative since it has been used by industry professionals (bankers, stock advisors, traders…) for many years, making it available to a less sophisticated audience is absolutely innovative.
How does robo-advisor work?
Each platform has its own specific algorithmic model, and management performance may fluctuate from one robo-advisor to another. Just like traditional advisors, there are good robo-advisors and less good ones.
Robo-advisors are most often presented in the form of a website. This site offers you a questionnaire in order to know you better. These questions are usually about your age, your income, and your financial goals. Your answers are then analyzed by an algorithm to propose a personalized investment portfolio adapted to your project.
Once you have set up your portfolio and invested money, the robot advisor takes over. It will regularly adjust your portfolio, i.e. rebalance it so that it remains diversified and coherent.
Often robo-advisors, like Market-Signals for example, invest via ETFs.
Who are robo-advisors for?
With their advanced technologies, virtual financial advisors are very attractive to a young audience. Indeed, their autonomous management and their complete dematerialization are very interesting factors. But the target of these online advisors is not limited to young people, but also attracts the 45-65 age group. The autonomy for their investments as well as the more lucrative returns than the traditional method are attractive elements for this public.
The advantages of robo-advisors
Robo-advisors have many advantages over traditional services offered:
Price: robo-advisors are clearly cheaper than traditional players;
Simplicity: robo-advisors work via a web platform where the client can follow his portfolio or recommended allocations;
Accessibility: it is not necessary to invest a fortune in order to benefit from quality investment advice;
24-hour monitoring: the monitoring is regular and personalized thanks to this technology, available 24 hours a day;
Quality of advice: the quality of advice is the same for all investors, regardless of the amount invested.
Time saving: it is no longer necessary to make an appointment with an advisor, in a few clicks you have access to your portfolio.
The disadvantages of robo-advisors
Performance: the operation, which is based on algorithms, does not exclude errors and unpredictable results.
Lack of human support: human support is very useful to manage changes related to the investor’s profile. Since this is only based on an algorithm, this technology does not adapt correctly to fluctuations, and can event less answer the doubts or interrogations that the investor could have.