The rise of the robo-advisor sounds like the ominous title of a sci-fi movie, but the reality is much different. The use of robo-advisors has been increasing in recent years as investors look to take advantage of their benefits. But what are they? What do they offer? And should we trust them?
What is automated investing, and what are robo-advisors?
A “robo-advisor” is a digital platform that provides automated investment services. Automated investment services are also known as “robo-advisors” because they incorporate technology into investment recommendation and portfolio management. However, the term robo-advisor can be misleading as humans design the framework for providing advice. It is also important to remember that robo-advisors are regulated entities and have a fiduciary duty, which means they’re required by law to act in your best financial interest at heart. FLIT Invest is a digital platform that provides automated investment services, so we are a robo-advisor.
What are the benefits of using a robo-advisor?
Given the affordability and digitization of automated investment services, it is no wonder Gen Z is increasingly utilizing robo-advisors. There are 3 clear benefits to using robo-advisors:
The data science involved in robo-advisors also creates a more affordable service than traditional financial advisors as the technology reduces operational costs. Many robo-advisors also have low account minimums making them a popular option for new investors with modest incomes.
By not relying on human-human interaction, robo-advisors are available 24/7. You can take control of your money anytime and utilize that always-on convenience. Creating an account with a digital service is much easier than some traditional banking options involving registering at a local branch.
To everyday investors, the main benefit of automated investing is the hands-off, set-it-and-forget-it approach that it allows for. You can invest your money and manage portfolios with minimal effort making investing more accessible to people who are short of time or expertise. Automation is a major benefit for people just starting their investment journey who are still building their financial literacy.
What are the drawbacks of using a robo-advisor?
Some limitations to robo-advisors might be worth noting depending on your circumstances. Some investors feel that robo-advisors lack the personal touch, and these services may be inaccessible for individuals who are not particularly digitally literate. Other investors wish for greater control in selecting funds, which can range from one robo-advisor to another. Some automated investment platforms may not be a good fit for investors who want to buy individual companies or choose from a broader range of funds beyond ETFs (exchange-traded funds). Moreover, many robo-advisors solely provide investment advice and do not extend to other financial services as a traditional advisor would. For things like tax management and advice on budgeting, users of robo-advisors will generally have to source this information elsewhere.
Why should I trust a robo-advisor?
According to Statistica, assets under management ($$$ managed) in the Robo-Advisor segment are projected to reach US$1.95tn in 2023. Robo-advisors are increasingly taking over the investment management space, and it’s no wonder. Despite being automated, robo-advisors are still regulated entities. They have a fiduciary duty, meaning they are legally required to act in your best financial interest.
Don’t underestimate the tailoring of advice just because there’s an algorithm involved. The advice from robo-advisors can be highly personalized based on your investment goals and personal preferences that are generally collected after answering a series of questions about your investment goals, time horizon, risk preferences, and financial background. The algorithm that provides the portfolio recommendation usually follows industry best practices that have been around for decades to optimize investment portfolios that suit your needs based on your investment profile.
Also, robo-advisors, similar to human advisors, do not just stop at providing initial portfolio recommendations but also monitor your investments and trade your account periodically (also called rebalancing) so you don’t have to manage your investments constantly. As mentioned before, since robo-advisors are regulated entities that are managed by financial professionals, the mechanism for the advice they provide is guided by the principle of always putting your financial interest first. This is in stark contrast with broker-dealers like Robinhood or Webull, for example, where they do not have to follow the same fiduciary duty.
Simply put, when investing with a robo-advisor, you’re not putting your trust in a robot but in the professionals who manage the portfolios.
How does FLIT Invest provide automated investment?
FLIT Invest’s process to provide investment recommendations is simple. Our advice is personalized based on your investment goals and personal preferences that you indicate by answering a series of questions. Your investment profile is customized based on your age, investment experience, risk tolerance, and environmental and social preferences. We follow a simple mantra as we design recommendations keeping your best interest at heart: your investments, your values.
Despite making as much of the process as automated as possible for the user, we still have a strong team of experts behind the data.
With FLIT Invest, impact investing is made easy. Set up recurring transfers and invest automatically, starting with as little as $10, into pre-vetted impact investing solutions that otherwise require $250,000+ investment minimums. Your investments are diversified across hundreds of stocks and bonds, including high-impact themes such as Climate Solutions, Clean Water, and Affordable Healthcare. FLIT Invest automatically manages your investments, so you don’t have to worry about the hassle of investment research, trading, rebalancing, and tax optimization.
Our team of experts also ensures that managers are accountable to their sustainability mandates to prevent greenwashing and provide transparency about the impact your money is making via in-app impact measurement and reporting. You can track your portfolio’s impact with your personalized carbon scores and thematic impact metrics and see how your investments contribute to the United Nations 17 Sustainable Development Goals.
For everyday investors, robo-advisors are a likely choice, especially for those with small amounts to invest or who are new to investing. If you have further questions about how FLIT Invest provides automated investing, feel free to check out our Impact Investing articles, and if you find a question unanswered, get in touch!
Footnote 1: Content is for informational and educational purposes only. Any views, strategies or products discussed may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. The information contained herein should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing.
Footnote 2: FLIT Invest does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.