Recently, the Capital Markets Authority green-lighted the first robo-advisory firm in the country to launch its services.
A robo-advisor is simply a service—almost always accessed through a website—that relies on computers and algorithms to invest and manage money for investors.
Typically, computers design a portfolio that blends a mix of instruments such as stocks and bonds tailored to the client’s goals and tolerance for risk.
The fintech revolution is finally taking over the financial advisory world. Robots or the so-called Robo-advisors have finally succeeded in building a wonderful niche for themselves.
The sub-industry now controls billions of dollars in assets under management. Recently, the Capital Markets Authority green-lighted the first robo-advisory firm in the country to launch its services.
But what is a robo-advisor? A robo-advisor is simply a service—almost always accessed through a website—that relies on computers and algorithms to invest and manage money for investors.
Typically, computers design a portfolio that blends a mix of instruments such as stocks and bonds tailored to the client’s goals and tolerance for risk. In short, robo-advice is the application of technology to the process of providing financial advice, but without the involvement of a financial advisor.
How do they work? One starts by entering data and financial information about themselves, and the system then uses an algorithm to score the information and decides what investments should be chosen.
The system then presents an investment strategy, which is usually passively focused and allows easy implementation.
Beyond investing a customer’s funds, robo-advisors generally will offer two main services; diversification and auto-rebalanci\sng - a rebalancing of the investment account to keep the asset allocation in line with the client’s original guidance.
In return, the client is charged a monthly or quarterly management fee deducted from the customer’s account. Because a computer is doing most of the work rather than a human, the costs will tend to be lower than that of a human advisor—in the range of one percent to 1.5 percent annually of the assets in the investor’s account.
In contrast, a human investment advisor will probably charge a fee of two to three percent or more of the assets under their management per year. But is a robo-advisor right for all investors? The truth is that some will like it, some won't.
That said, robo-advisors tend to be especially well-suited to newer investors who haven’t yet built much wealth, and who would like to outsource money management to a professional for a reasonably low cost.
For one, robo-advisors offer a low barrier to entry, due to low account minimums. If you don’t have a lot of money, you’re in your 20s and 30s, a robo-advisor can be a good start.
But not all is perfect. Robo-advisors' main strength is also its disadvantage - they suffer from limited human contact and less personalisation.
They are limited to offering investment strategies designed for a specific profile, not an individual investor.
Besides, they cannot talk to clients through situations on demand. Those may include the reasoning behind a specific strategy recommendation or hand-holding in daunting times such as job loss or a cratering stock market.
That notwithstanding, I have no doubt that robo-advisors are going to be an alternative to traditional human financial advisors.
However, I believe the future will have a combination of the two approaches. Ultimately, whether a robot or a human manages your money, it all comes down to what you as an investor want from the relationship.
The writer is managing director, Canaan Capital
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