Robo-Advisors: What Are They, The Pros And Cons

A Robo-advisor is a digital wealth manager and cost-effective alternative to a financial advisor. They aim to fill the gap between personalised financial guidance and self-directed online trading platforms. You answer online questionnaires about your financial goals, risk tolerance, and investment time horizon.

A Robo-advisor builds a portfolio from your answers from a limited menu of pre-determined choices of stocks and ETFs.

Can ASX investors find value in considering using Robo-advisors? While they don’t replace personalized financial advice, if you are time-challenged and looking for lower-cost automated options, they have a place.

How a Robo-advisor works

The Robo-advisor uses complex algorithms and pre-built investment models often based on Passive ETFs to:

  • Build a diversified portfolio: This aligns with your risk profile and goals, automatically allocating funds across asset classes such as stocks and bonds.
  • Rebalance automatically: As market conditions change, the Robo-advisor adjusts your portfolio to maintain your desired asset allocation.
  • Basic financial planning: Some offer tools and resources to help you budget, track expenses, and retirement plan.

Why consider a Robo-advisor?

  • Time savings: Automate portfolio management and rebalancing, freeing up your time for research or other pursuits.
  • Cost-effectiveness: Robo-advisor fees are typically lower than traditional financial advisors, especially for smaller accounts.
  • Diversification: Access a diverse range of assets through ETFs without manually selecting individual holdings.
  • Discipline: Stick to your investment plan through automated contributions and rebalancing, avoiding emotional decisions.

Things to keep in mind:

  • Limited choice or customization: Robo-advisors offer pre-built stock or ETF portfolios. This limits your individual stock picking and sector bets.
  • Black box approach: You might not have complete transparency into the investment decisions the Robo-advisor’s algorithms make.
  • No complex strategies: Robo-advisors may not be suitable for highly complex investment strategies or unique financial situations.
  • Entry level: For more experienced investors with large portfolios or with complex strategies they might not be optimal.

Other considerations

  • Features: What features do they offer? Personalised investment plans? Socially Responsible Investing (SRI) options, 24/7 customer support.
  • Management fees: What is the annual fee on balances? Other costs.
  • Account types: Do they offer multiple accounts? Individual as well as SMSFs and corporate entities?
  • Investment approach: What is the investment approach based upon? Passive or Active? Diversification? Income or capital gain? Stocks and ETFs?

There is a limited number of Robo-advisors in Australia. Most of these are fintech startups and one or two long-established digital platforms.

Remember

For entry-level investors looking to “set and go,” they could be useful.

For the experienced investor, automation and cost-effectiveness is useful while you maintain control over your overall investment strategy.

 

 

Disclaimer

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