Robo advisory is fostering a revolution in DIY investing

By Valuefy

December 8, 2018


As the adage goes, the best time to start investing is yesterday, the second best time is now. Millennials want to invest their money, however, a major roadblock that stops them is that they often consider their earnings too paltry to start investing. This feeling may often last till their late 30s or 40s until they start making reasonable incomes, the kind that the baby boomers were making in their early 20s.

Most traditional advisors have minimum asset requirements which are quite steep such as assets of $500,000 or more which puts them out of reach for the average Millennial. Traditional advisors also charge sizeable commissions, on average of 1% to 2% of assets under management. In such a scenario, Millennials are wary of traditional advisors as they have to beat the market by a large margin to even cover the high cost of commision and create any value.

Added to this, millennials also tend to have a heightened mistrust of financial institutions. This is due to the fact that most millennials grew up and had their most formative years during the great depression. The combination of these factors makes millennials hesitant to adhere to ‘status quo’ investment patterns, instead, they prefer to put their trust in tech-driven or DIY solutions.

The paradigm shift: from trusting people to trusting Artificial Intelligence

The biggest challenge in DIY investing is often getting started, what information to consume, what to disregard, and what to act on. The entire process gets a bit overwhelming as there’s information overload on the internet which tends to cripple modern-day investors.

Established news sites like Moneycontrol, Bloomberg, Economic Times, Financial times are all fine sources for investment advice, however, for a beginner investor, it can be a nightmare to track and monitor the news constantly and connect the right dots. Gathering the right inferences from a glut of data is what makes DIY investing so challenging.

Artificial intelligence based solutions offered by Robo advisors can help solve this problem, by creating curated and actionable advice according to goals set by investors. AI can churn through Terabytes of data, study market trends, make analyses and projections and give out predictions that minimize risks involved in DIY investing. The technology may seem complicated, but the end user benefits as they only have to act on ‘actionable advice’ while all the complicated algorithms do the number crunching for them.

Robo-advisors chart the best course of action by analyzing goals, risk tolerance, and investment preferences. Investors can monitor the entire process through simplified dashboards that offer different levels of granularity. Most Robo-advisors are clear and transparent and often intuitive to modern day users who use apps for everything from ordering food, getting around town, and even dating.

Why Robo-advisors? – Convenient, low fees and DIY

The interest in Robo-advisors as an ideal solution for millennial investors is being spurred by increased transparency, accessibility, low fees and best in class customer experience offered by them as opposed to traditional advisors. The ability to invest via apps on their phone or on the web has led to another spurt in the growth the category.

Most Robo-advisors charge up to 0.50% of total assets under management with most advisors offering free services until $5000 or $10,000, depending on their target audience. They also hold off on charging account-opening fees, withdrawal or account-closing fees, trading/commission fees, or account transfer fees and stick to clear and simple management fees to appeal to millennials.

Is a Robo advisor the right fit for you?

If you are just getting started in investing and want to dabble in the markets yourself while still minimizing risks, Robo-advisors are your best bet. Their simplified user experience can help you monitor your finances on the go, eventually developing a taste for investments. Robo-advisors can help you temper your instincts and make better decisions, all without incurring the costs and inconveniences that come with a traditional human advisor. Even experienced investors are choosing to go the Robo route and transition from expensive actively managed accounts to low-cost automated alternatives.

Robo advisory, however, is not a one size fits all solution. There needs to be careful consideration of one’s financial goals before settling on one. If you have a large and complicated estate, or you’re invested into many different types of assets a human touch may be necessary. They may also not be the right fit if you have specific needs that don’t fit traditional models such as succession planning, multi-currency portfolios etc.

However, these aren’t really the target audience for Roboadvisors. If you have a fairly simple and more straightforward portfolio and you just want to get started, then Robo-advisors are the perfect starting point for your investing journey.

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