What Is A Robo Advisor And How Do They Work?

A robo-advisor is a cost-effective tool used in place of a flesh and blood investment advisor. It is a complex piece of software that uses specialized algorithms to help its user make investments. These programs take into account their user’s personality as well. The program will ask its user a variety of questions to gauge their willingness to take risks, their financial situation, and their goals. Depending on the user’s preference, the program will then use this information to offer financial advice. Or, it can begin automatically investing. Robo-advisors generally use Exchange Traded Funds due to their transparency and security.

The Nuts and Bolts
To find out more about how robo-advisors work, we have to choose one in particular to analyze. Moneyfarm is a robo-advisor service founded in 2011. The goal of the project was to provide a family-affordable wealth management service that would keep investors safe. Like other robo-advisors, the program uses complex algorithms to make safe and profitable investments. The program accounts for many factors. Geography, currency exposure, asset classes, and market fluctuation are all taken into consideration. But, it is not only the program that looks after your investments. Real investment experts regularly monitor portfolios to ensure everything is going smoothly. Like other services, they differ their services based on the user’s taste for risk. We can see this by examining their program. They offer 12 different portfolio options. There are two different profiles dependent on investment amount. There is the over 50,000 investment category, and the under 50,000 investment category. There are 6 separate profiles in each that are dependent on risk tolerance. To show evidence of their platform’s effectiveness, their website provides twelve example portfolios. The growth increases with the risk, as expected. The under 50,000 portfolio that has taken the riskiest approach has grown 12.2% annualized. The growth in the over 50,000 investment category is more conservative. The portfolio at the highest risk level brings in an increase of 9.5% annualized. Robo-advisors investments clearly work.

Are They Effective For You?
Many investors feel unsettled by the idea of having their finances managed by a computer program. Some will imagine scenarios involving the program selling off their investments for a pittance. This has not happened once, and it is not necessary to give a robo-advisor complete control of your finances. The robo-advisor should be viewed as an advisor and nothing more. You do not need to give it permission to make investments. You can instead take its advice into consideration and make your own investments. In addition to this, robo-advisors tend to make the safest investments possible. They do not take huge risks. It would cause too much controversy if they did so.

Robo-advisors are a great option for people who’re looking to slowly and safely grow their money. But, due to the inherently low-risk investments made and recommended by robo-advisors, those who’re looking to take big risks with massive sums should stick with conventional financial advisors. Yet, even for high rollers, robo-advisors are a good option for side income.