Should I Use a Robo Advisor?

Should I Use a Robo Advisor?

Many financial companies offer online financial advisors known as Robo-advisors. In reality, practically every financial institution either has its own Robo-advisor or works with one. Is a Robo-advisor appropriate for you? The answer, like most in the world of financial planning, is – ‘it depends’. Here are some ideas to consider.

What Kind of Advice Do You Require?

The first thing you should consider is what level of assistance and competence you require to handle your money. You need best financial advisors if you have a seven-figure portfolio and require help in difficult areas such as tax preparation, estate planning, stock option exercise, and the like, a Robo-advisor is probably not for you. People like these would benefit more from a relationship with a more typical financial advisor.

Many of today’s online advisors may be suitable for millennials and those with smaller portfolios that require asset allocation guidance and perhaps some basic financial planning assistance. Robo-advisors, for the most part, build portfolios based on passive strategies like indexing. They are simple investment techniques that leverage ETFs to maximize the risk vs expected return of a portfolio.

Beginners and those who prefer to set it and forget it are likely to appreciate the automation provided by Robo-advisors. Robo-advisors are tempting to consumers who would not typically be able to afford a regular financial advisor because they are low-cost and do not demand large minimums to create an account.

Should I Use a Robo Advisor?

You won’t be able to choose stocks or strategies with a Robo-advisor. All decisions are made for you by Robo-advisers. If you don’t have a lot of money to invest but want more control or autonomy in making investment decisions, consider self-directed online trading platforms, all of which now offer free trading in most stocks and ETFs.

All Robo-Advisors Are Not Equal

Just as not all traditional financial advisors are the same, not all online advisors are the same. Traditional financial advisors differ in their areas of specialty, how they are compensated, and the sorts of customers with whom they deal. The same is true in the Robo-advisor market.

Some Robo-advisers allow only broad-based index investment. Others are increasing, including socially responsible portfolios for clients who are concerned about such issues. Some others, allow customers to personalize their portfolios. 

Accessibility and Convenience

One of the key benefits of dealing with online advisors is the ease with which their services can be accessed. Because this generation is accustomed to purchasing goods and services online, why not financial advice?

Online advisors are available 24 hours a day, seven days a week, which may appeal to a wide spectrum of clientele. With everyone’s hectic schedules, this level of accessibility may be the push for some people to go and obtain the financial assistance they require.

At the same time, many Robo-advisors are completely automated and require relatively minimal human intervention. While some firms have financial advisors on staff to handle calls and consumer queries, the majority of these advisors do not work on your portfolios or investing decisions; those are handled by algorithms. These human interlocutors, on the other hand, are there to keep your emotions in check, acting more like a coach or therapist than a financial counselor.

Understanding the Motivation Behind the Advice

The fact that an online advisor is easily available and fairly priced does not imply that the advice is sound. Anyone considering using an online advisor should do their homework beforehand and understand how financial suggestions are made.

Most Robo-advisors use some form of an algorithm in order to provide financial recommendations. While you may not be a mathematician or an investment specialist, ask questions and research their investment process to see whether it makes sense to you.

The majority of Robo-advisors use modern portfolio theory (MPT)-based investment strategies in some form or another, and Robo-advisor investment methods may frequently be found by browsing their website. MPT is a way of optimising indexed portfolios by calculating the appropriate asset class weighting mix that produces the maximum expected return for a given level of risk. They are not necessarily the best financial advisors but may just be sufficient for you.

A financial advisor can assist you in managing your complete financial life, and some financial advisors assist with many elements of finance while not working outside of portfolio management.

Should I Use a Robo Advisor?

What Happens When the Market Is Volatile?

Some investors may be concerned when a market is turbulent. As a result, they react in various ways, such as calling their financial counselor, altering their portfolios, or simply leaving everything alone.

Robo-advisors, which perform well as long-term investing tools, enable investors to select portfolios based on a set of personalized financial goals, with portfolios rebalanced by investment professionals via the Robo-advisor. When the market becomes turbulent, emotions can run high. A Robo-advisor, on the other hand, makes disciplined recommendations that are not influenced by emotions.

For example, Robo-advisors performed well in the face of market volatility in 2020. According to Backend Benchmark research, several Robo advisers with unique strategies or holdings scored better in terms of performance above/below the Normalised Benchmark.

For some cautious investors who require a more personalised approach to their portfolios, a personal advisor who can talk to you about the market and your options may be a better bet. However, while Robo-advisors are poised to outperform during market turbulence, investors who require individualised one-on-one care may prefer a human advisor.

In conclusion

The growth of technology and changes in general, have an impact on all organisations, including the financial services industry. And because financial advisors rely on technology for so much of what they do, the move to online advisors comes as no surprise.

Is an online advisor appropriate for you? Many people may answer ‘yes,’ particularly the younger, less-affluent investors who may be underserved by the financial services business. As Robo-advisors evolve within large financial institutions, they will most certainly continue to provide even better options for investors and knowledgeable financial advisors.

However, if you’d rather have an Australian financial advisor, contact us at Omura Wealth Advisers to get an experienced financial advisor in Sydney or anywhere within the country.

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