During the global financial crisis of 2008, the very first robo-advisers were launched, that is a class of financial adviser that was able to provide investment management online with only moderate human oversight.
In 2010, 30-year-old entrepreneur Jon Stein launched Betterment and robo-advisers increased in popularity.
Part of the reason behind the surge in popularity was the fact that robo-advisers were able to provide automated investment advice at low cost, even for accounts with low balances, while employing portfolio management algorithms.
Most robo-adviser services are limited to providing portfolio management without addressing issues such as estate and retirement planning and cash-flow management, which are also the domain of financial planning.
Robo-advisers provide this financial advice based on mathematical algorithms designed by human advisers, investment managers and data scientists. However, the algorithms are executed by software programs and do not require a human adviser to impart financial advice to a client.
The software is able to automatically allocate and manage the investments of clients based on their stated goals (for example, whether they are looking for long or short-term returns, risk preferences, or desired target return).
While robo-advisers have the capability of allocating client assets in many investment products such as stocks, bonds, futures, commodities, real estate, the funds are often directed towards ETF portfolios.
“Robo-advice is a solid middle ground between do-it-yourself investing and engaging a financial planner,” Motley Fool’s chief investment officer Scott Phillips told the ABC.
“There are drawbacks, though – robo-advice doesn’t generally cover things like investment structures and estate planning, and sometimes it’s nice to be able to pick up the phone or send an email to get personal advice – or sometimes just reassurance.”
How it works
According to the ABC, after filling out a questionnaire with your personal information, investment goals and risk tolerance, a robo-adviser will create an individualised portfolio for you.
Just like a human adviser, it is required to give you a statement of advice, which explains its recommendations and other key information.
The robo-adviser will then manage your portfolio, doing things like rebalancing it when necessary and executing trades.
The advantages of this system are that it is low cost, has low fees and low minimum requirements with fewer conflicts of interest.
The drawbacks are the narrow range of services, the lack of human interaction and the inability to gain all the information necessary from a brief questionnaire.
In Australia, robo-advisers are regulated by ASIC and must have a financial services licence. They also have a fiduciary duty to act in the best interest of their clients.
Would you trust a robo-adviser with your money? Do you prefer the personal touch of a human financial adviser?
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