The Rise of Robo-Advisors
Since first coming onto the scene in 2008, Robo-Advisors have experienced tremendous growth in popularity, especially among younger generations, due to their convenience and simplicity. In 2021, Robo-Advisors managed about $460 billion collectively in the US.
What are Robo-Advisors?
Robo-Advisors are digital tools that create and manage investors’ portfolios with very little human supervision. A typical robo-advisor works by asking the user a few questions about their financial objectives and investing preferences. The rest of the process is automated and the algorithm uses your input to craft a portfolio for you. Over time, the robo-advisor maintains your portfolio and makes trades appropriately in order to reach your goals.
Benefits of Robo-Advisors:
Robo-Advisors are great for people who are new to the stock market or don’t have a lot of time on their hands as they don’t require a lot of human intervention. This makes it easier for beginners to make money in the stock market, even if they don’t know much about it. Another benefit of robo-advisors is that they have little to no account minimums and low annual management fees of around 0.50% or 0.25%, compared to the typical 1% a traditional financial advisor would charge.
Drawbacks of Robo-Advisors:
Along with all of these benefits come a few drawbacks of robo-advisors as well. One drawback that is often brought up when talking about robo-advisors is that they aren’t very sophisticated, so the question becomes: can you trust that the robo-advisor will make the right choices with your money based on just a simple questionnaire? And another common concern is that robo-advisors lack the human element. They simply cannot sense how the investor is feeling, and if you ever have questions about the market, it can be difficult to get answers, compared to a traditional financial advisor where you can talk to them face to face and ask whatever questions you may have.
What Does This Mean For The Future:
The demand for robo-advisors will only grow, as more people learn about the stock market, and want to be part of it. In fact, analysts are already estimating that robo-advisors might manage $2.1 trillion in the US by 2026. The complexity of robo-advisors will also continue to increase, and over time they will become more comprehensive, making them more appealing options for investors.