5 Ways Robo-Advisors Are Changing the Investment Industry

Daniel Penzing
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1: You No Longer Need a Ph.D. to Manage Your Investments

When it comes to investment management, traditionally these services have been offered exclusively by companies and individuals who have a CFA (Chartered Financial Analyst) certification. This has led to several problems, particularly in the fee-based business model. As demand for these services has increased, the pool of eligible applicants has shrunk nearly to nothing.

2: Costs Are Falling to All-Time Lows

Robo-advisors offer one of the lowest costs to start investing, around 1-2% of your portfolio. This is lower than most mutual funds. Robo-advisors appeal to investors who are not comfortable picking their own stocks. It has lowered the bar for entry to the investment industry, allowing a lot more people to get comfortable with financial decision making.

Additionally, it’s not just the lower costs. Robo-advisors also have higher customer loyalty than traditional financial service companies. Users are also more likely to keep their assets with the company, forcing those older companies to drive down fees.

Investors Don't Have to Worry About Rebalancing

One of the biggest issues for investors is making sure that their portfolios are properly balanced. If you oversave in a few areas, it will throw your portfolio off and make it so you're not properly invested. Robo-advisors are automatically rebalancing your portfolio based on your investment goals.

Tax-loss Harvesting for the Masses

Tax-loss harvesting—the practice of selling a security at a loss to offset a capital gain—has traditionally been a resource available only to wealthy investors who have the right account types and high account minimums. Not only that, but tax-loss harvesting is not always available from a broker because it can be used on only one or a few investments at a time. A robo-advisor, on the other hand, can handle the tax-loss harvesting process using whole portfolios of individual stocks, eliminating this obstacle to doing it as a mass-market investment solution.

Democratized Access to Quality Investing

Investing tips and guidance from individuals like Warren Buffett, Jim Cramer, and Peter Lynch have been immensely valuable to those who have the access and the good fortune to pick up the phone and call them for advice.

These individuals are usually industry insiders or the heads of financial institutions that offer investment products.

Robo-Advisors Democratize Access to Investment Advice

Though these investment giants may command premium to impart their wisdom, the cost of a financial advisor that can provide similar quality advice is much lower – or higher depending on who you ask.

Now, there are still a good number of purists who would prefer to get advice from a human rather than a robot. But the rise of robo-advisors, technology, and the increasing prevalence of smart phone usage have made getting advice from an expert much more accessible to the masses.

If you choose robo-advisor services, you can ensure that your investment is diversified, have it automated instead of doing it yourself, and get advice from human financial advisors if you need it.

Let’s look closer at some of the best robo-advisors available in the market today. Each of them has different features that could help in finding the type of assistance you need.

Robo Advisors Keep Getting Better

Online investment management didn't really start gaining traction until the year 2000 and it wasn't until much later that it became a mainstream financial planning solution. In the early years, the services were rather rudimentary in their offerings as online platforms simply contracted with financial advisors to handle client accounts.

However, while this approach worked well enough in 2000, it didn't take long for investors to realize that there was still a need for simple, automated financial advice. For example, investors wanted services that were more transparent and offered greater diversification.

This was the reasoning behind the birth of the robo-advisor, as it was named. Today, the entire financial planning industry is being revolutionized by robo-advisors. And they are not done improving themselves, either. In fact, we've already seen the beginning of the next phase of evolution.