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  • Writer's pictureJohn Brandy

What Are Robo Advisors?

Updated: Apr 27, 2022

What are they?

Let's break it down.

It's a combination of two words:

"Robot" and "Advisor".

I'm going to assume we know what a Robot is.

And I'm going to assume that we know what an Advisor is.

With luck, they'll know what investors are.

And we'll know the difference between them and human advisors.

The basics include the fact that we can get mutual funds, exchange-traded funds, stocks, bonds, real estate, crypto and many more client assets and asset classes, just like with human financial advisors.

The key is - do we know what the combination is - have we ever heard the term - and what do we think about it?

We start with an advisor - this is someone who can help us understand - or demystify as we often say - the investment market.

When I do it, I like saying that I am translating.

I translate quite often and so do many other people even if they don't think of it that way. This is true in sales, software, and nearly every other area when we think about it.

Now a robot is somebody or someone or something which can do the same task as a person - in this case, a personal advisor - but because they're a robot they can at least, in theory, work with any given asset longer cheaper and more consistently and reliably.

They don't make human mistakes with things like rebalancing, tax-loss harvesting, and other financial goals.

From the consumer perspective, cheaper is a big driver of course, but it can also be generational.

Most of the Greatest or Silent Generation either did not want to use their computers to invest or to access many other things.

The baby boom generation began to trust these things and use them to improve their performance, however there is still some resistance.

The younger generations, starting with Gen X, but most notably Gen Y or the millennials have embraced this.

In many activities of daily living, it's difficult to ask any millennial, my Spanish consultant notwithstanding, how to do a given task completely on their own without the help of a robot.

Without the help of a website. Without the help of Artificial Intelligence or Artificial General Intelligence, which is not the same thing.

Among the largest Robo-Advisors that have sprung up in recent years are Betterment, Wealthfront, Personal Capital, Prosper, and of course e*Trade, on which we'll spend a minute in another episode.

One, SoFi Automated Investing, focuses on paying off other people's student loans, which is kind of cool.

And of course, one investment advisor which has come under a lot of recent scrutiny, Robinhood.

Even traditional brokerages like Merrill Lynch and Charles Schwab are upending the industry, either inventing their own service or buying one. According to one Schwab commercial, having Schwab Intelligent Portfolios was the only way to go. I'm sure the same message was being put out for Vanguard Digital Advisor Services, as well as others.

They can all provide great investment advice, investment options and some, though limited, investment strategy and recommendations.

So the long and short of it is, a robo advisor is an automated service used by investors to manage investment portfolios with little or no human interaction. To achieve automation in delivery, robo advisors use a combination of inputs from the investor and intelligent computer algorithms to build and maintain the portfolio of investments.

Many people, mostly younger people (which is why I mention millennials while hopefully not sounding like I'm picking on them) think of Robo-Advisors like this first when they think of investing.

How do they work?

Robo-Advisors provide automated investment portfolio management to an investor-client, based upon collected data, which is typically collected through an online survey. The data may lead to a range of services, such as investment recommendations and portfolio rebalancing.

The primary services offered by robo-advisors may include:

  • Risk profile and assessment

  • Investment recommendations

  • Portfolio rebalancing

  • Tax loss harvesting

  • Asset allocation

  • Diversification

  • Mutual fund selection

  • Fund tracking

  • Other services

These services are provided by a team of professionals who often work remotely from the client’s home.

As mentioned earlier, the main difference between robos and traditional financial advisors is that robos don't charge a fee.

This means that if you're looking at $10,000 per year, you could potentially save thousands over time.

Story Time

Once upon a time, our friend an investor was considering what to do.

Her choices were endless.

She hunched forward over her computer and stared at all of the different options.

Dozens of them - one on every browser tab. Here one investment choice, there another.

She wasn't even aware of the gas-powered leaf blowers everywhere outside her home office.

She was observing completely with her eyes to the extent that her ears weren't registering what she might normally consider routine sounds.

One site offered the ability to automatically re-allocate her funds on a regular basis to increase optimization a couple of times a year. Another offered more variations in financial products.

She was playing with apples-to-apples comparisons after all.

If that was available on another site it wasn't clear and obvious.

They seemed to be focused on expense ratios.

Online access is important, but not instead of planning and personalized advice.

The third site made a big deal of the market performance of online advisors versus traditional advisors.

"How is this a good use of my time?", she thought? "Where were the unbiased reviews?"

Then came her Epiphany.

She didn't have to bank everything on one right answer from one Robo-advisor and the investment products that they offered.

She could diversify using the idea of a minimum deposit, and she realized that this would only further her investment goals.

She could take a little bit of her investable assets, her hard-earned savings and some of her extra cash and put it into one of them with a range of portfolios.

But then a little bit more in another.

And then a little bit more in yet another.

As long as the total didn't exceed the plan or a comfortable financial situation it was OK.

It was OK if she split it up in multiple ways - in fact, I would encourage her - and you - to do so with a wide range of choices.

Later she could decide on a favorite and add to that one first. She was over the hump of finding advantages in the airquotes "perfect one".

She got over the tendency that we all have to put off an action when we even suspect that the result might not be clear.

She overcame what we must also overcome.

How we overcome

How do we overcome this problem?

What is our call to action this time?

If it seems like I'm harping on this, it's because I am!

From my experience, I know that this problem occurs over and over in lots of different areas.

This does not just happen in financial investing.

Maybe it's washing your car.

Maybe it's taking vitamins.

There are many different possibilities, but they all have in common the requirement to build a habit.

So, we're going to overcome the problem by doing something about it.

We're going to have a Robo-advisor.

No! We're going to have two Robo-advisors.

No! We're going to have three Robo-advisors. Why did Monty Python just come to mind?

And that's a start.

I mentioned one already in a previous podcast called Prosper.

I'm not hawking that, and I don't work for them. They're like a fund for lending.

Of all the wealth management services, they are just one possibility, though.

I bring it up again simply because it's an easy one to deal with and its relatively low risk.

It's a great start.

How to go about that involves going to their website and getting started.

Spoiler alert in reverse, right?

It involves not getting overly caught up and thinking that this is the only right answer or the only right way to reach financial goals or investment goals.

It's not the only right answer.

The more weight that you put on this one thing being the only right answer, the more you focus on one investment selection offering or one investment service, the more likely it is that you will not be happy with it.

Being happy is the absolute most important thing you could ever do toward your happiness.

That seems obvious, but this is a key element of your financial planning happiness so focusing on it is the right thing to do.

Drawbacks to using a robo-advisor.

First, there's no human interaction.

You're basically giving your money away to a computer program.

Second, you won't be able to talk to anyone about your investments.

If you want to change something about your portfolio, you'll need to do so yourself.

Third, you won't get personalized attention.

There are also some downsides to robo-advisors.

For example, if you're trying to invest in a specific asset class, say real estate, you might find that the robo-advisor doesn't offer enough choices.

Or, if you're interested in a particular type of mutual fund, you may find that the robo doesn't offer it.

Finally, there's a risk that you will lose access to your funds if you leave the company.

So what should you look for in a robo-advisor?

Three things to consider before signing up with any robo-advisor

1. Fees

It's important to know exactly what fees you're going to pay.

Some companies have hidden fees, but most will disclose them upfront.

Also, make sure you understand the terms of the contract.

2. Customer Service

Look for customer service representatives who are knowledgeable and willing to help you.

3. Investment Options

Make sure the robo has a wide variety of investment options available.

Also, check to see whether the robo offers ETFs, index funds and other passive strategies.

What are the benefits of robo-advisors?

There are many advantages to robo-advisory services.

Here are just a few:

  • No commission or transaction costs

  • No minimum account balance

  • No personal advice

  • No long term contracts

  • No paperwork

  • No tax liability

  • Access to multiple portfolios

  • Automatic diversification

  • Access to more than one advisor

  • Low cost

  • Easy to use

The main disadvantage of robo-advice is that you can never be 100% certain that you've made the best decision for your needs.

In order to protect against this, robo-advisors usually recommend that you take advantage of their advisory services.

In fact, they are required to give you a full set of investment recommendations.

And since these recommendations come straight from the robo, you can rest assured that

they are unbiased and objective.

A single Robo-Advisor would treat all of their customers exactly the same way, like the sophisticated investors we can all be.

This can certainly lead to people thinking that it's a more level playing field, and that may be the case

We’re changing the way we look at things, and

Remember, “THAT’S GOOD”.

Also remember, this is Financial Life Coaching from A Happiness Perspective! Coaching Happiness.

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