All Financial Wisdom
Robo Advisors: Best of Both Worlds?
Despite its contemptuous connotation and imprecision, the word Robo Advisor is already beginning to be used normally and as a definition of a new Fintech sector; That of the automated manager of investment portfolios.
The Robo Advisors themselves already accept it as an easy way to classify their activity, while still claiming the true breadth of their services. It’s still a new financial service that few know, and therefore we thought it would be useful to shed some additional light on them.
The word Robo Advisor was a word coined by traditional services to contemptuously refer to the new automated financial services that were beginning to appear. But oddly enough, the services offered by the Robo Advisors have little to do with the word that is literally comprised of the word “Robber + Advisor.”
What characteristics are common in a Robo Advisor?
Although they’re not robots, financial services that respond to the word Robo Advisor do tend to automate most of their activities. Therefore, Robo Advisors try to digitize their processes, operations, and relationships with their customers to the maximum. This usually includes:
- Recommendation of the investment profile according to personal characteristics and the proposal of an investment plan associated with it.
- Execution of initial investment and subsequent contributions, rebalancing and reinvestment.
- Online information of the portfolio activity and situation.
Management of delegated portfolios
As we said before, the vast majority are not advisers but portfolio managers, ie it’s a service where the customer fully delegates the management of their portfolio. And what is the difference between advising/recommending and managing?
Let’s use a food analogy. To eat right, we have two radically different options. A)Follow the recipe of a good cook or B)dine at a good restaurant to eat. We can eat well in both cases, but in the first case we must also know how to interpret the recipe, buy the ingredients, cook them, plant them, serve them and then wash the dishes. It’s the same with investments.
When they only recommend certain that we invest in certain securities, we must interpret the recommendation well, find a good service at a reasonable cost to execute our orders, follow our investments, and execute all necessary adjustments so that our portfolio is always well balanced.
Robo Advisors generally offer their services for half or even a third of the cost of traditional services. Low fees, all things being equal, means more profitability for the customer.
Low Capital Requirements
Not only do Robo Advisors give access to high quality services at low cost, but they do so for (relatively speaking) small investment amounts. With low entry minimums, they’re managing to democratize portfolio management and make it accessible to the masses.
Use of passive financial instruments
In general, Robo advisors use passive instruments, mostly ETFs, which are much more economical and require little to no active management.
Very efficient diversified portfolios
Although the degree of diversification varies according to the type of asset used (ETFs allow for much more diversification), most are based on creating diversified portfolios by optimizing the distribution of assets. This allows creating very efficient portfolios by optimizing the risk / return ratio for each risk profile.
Robo Advisors, unlike many traditional services, tend to clearly and transparently publish their implicit costs (that of the assets they use and any other transaction costs) and the explicit ones, that is, their own commissions.
The lack of transparency is one of the major problems of traditional services, which means that most end customers are not aware of what they’re paying for their services.
Being an eminently digitized service, the customer service tends to be more digital. This is an aspect that can differentiate some of them by offering more or less attention to their customers. That’s a long winded way of saying that you obviously wont get the same level of customer service as a human adviser, but human customer support does exist.
Where can I buy them?
In general, they tend to be entities created independently of large banking groups, or those that market funds or financial instruments. But there are some (Vanguard, Schwab, TDA for example) that do belong to great managers or that have been bought (Future Advisor by BlackRock).
For both common and non-common characteristics, a Robo Advisor is a real and efficient alternative for any investor.