What Are Robo-Advisors
A robo-advisor is an online, software-based, automated platform that can manage wealth. The investment service uses special algorithms and other programming to give advice on how to manage a portfolio. In other words, a robo-advisor performs similar tasks as a financial planner or advisor, but it is run by software instead of by humans.
How They Are Being Used
They have been most commonly used to give investment advice to their customers, and they tend not to manage the more personal parts of finances, like taxes. However, their uses are expanding today. Many are able to take personal situations into account in order to provide suitable investment advice. For example, when nearing retirement age, robo-advisors suggest to shift money safer investment types. Overall, robo-advisors perform similar to a target retirement fund, in that they automatically adjust the client’s portfolio when the market shifts to maintain a good combination of stocks, bonds, and other asset classes.
Advantages of Robo-Advisors
Robo-advisors are usually lower cost, making managing wealth professionally a bit more affordable. Most robo-advisors charge depending on how much the client invests with them, and this often averages out lower than the charge of a financial advisor, due to economies of scale.
In addition, they tend to set lower account minimum requirements. This means that, in order to get started with a robo-advisor, the client is not required to put in as much money, making it easier to get started while lowering risks.
While making investing easy, affordable, and enjoyable, robo-advisors also remove some of the uncertainty from investing. They create the portfolio, invest in ETF’s, continuously balance the portfolio, reinvest any dividends, and possibly even harvest tax losses.
Lastly, everything is shifting to be done quickly, through the internet or phones. Technology is focused around making life easier and more efficient, and robo-advising is another one of those developments to help do just that.
Different Types and Capabilities
Robo-advisors do differ from one another. First, costs range across the different service platforms. Also, some robo-advising services ask for money to be transferred to them, while others accept investments being stored at popular brokerages; this is a difference over custody. They may only support certain types of accounts: such as retirement accounts, taxable accounts, or accounts for the self-employed. Furthermore, some may limit which ETF’s the client can invest in. In addition, tax loss harvesting capabilities vary across different robo-advisors. Some may permit the client to invest in individual stocks, but most service do not not allow it.
Most robo-advisors fall under three main categories: fully automated, incorporation of existing brokerage accounts, and support of active trading.
Fully automated ones manage almost all components of investing. Once money is placed in the account, the robo-advisor takes care of everything, which also means that not much flexibility or control is available to the client.
The next type allows the user to keep money in an existing brokerage account, and the robo-advisor then manages the asset mix, rebalancing, and dividend reinvestment, within this account. These kinds of services also offer asset mix, or allocation, advice to allow the clients the option to manage their own accounts.
Robo-advisors that support active traders as clients offer the tools and advice to assist the client wanting to invest in stocks individually.
The Future of Robo-Advising
A relatively new but growing space, many robo-advisors are not profitable yet but do receive much funding from venture capitalists. Meanwhile, certain companies have achieved over $1 billion under management. Some prominent players include Betterment, Wealthfront, Personal Capital, Motif, and Asset Builder. Other more recent developments include, as examples, LearnVest and Ellevest, which launched a robo-advisor geared towards women in the United States. The more established brokerages and funds have begun to recognize and act on the emergence of robo-advisors. Recently, Fidelity partnered with Betterment, and Charles Schwab plans to release its own automated investing service, Schwab Intelligent Portfolios.
In Asia, the field is relatively new but growing at a rapid pace. That is, five out of six major Internet companies in Asia already have launched robo-advisors. 8 Securities, a Hong-Kong based mobile trading and investing service, released Asia’s first robo-advisor, 8 Now! in Japan in April of 2015. 8 Now! services both Japan and Hong Kong, and currently allows for any investment above $1000 USD. Also in Japan, Money Design launched the country’s first independent robo-advising company, which plans to focus on retail investing. Meanwhile, Bambu, operates as a B2B robo-advisor in Asia, and within two months of launch has secured partnerships with Thomson Reuters, Tigerspike, Finantix, and Eigencat. Infinity Partners and Smartly aim to launch soon as the first platforms in Singapore, along with the new-to-market and women-focused robo-advisor, Miss Kaya. BlackRock has begun working with Japan’s Mizuho Bank’s automated service, Smart Folio, and now looks to also partner with robo-advisors in Singapore. TenCent, based in China, offers its wealth management service through its messaging platform, WeChat. As the field continues to expand and evolve in Asia, the different usages of the robo-advising software will be seen.