How Robo-Advisors Work

Investing is the best way of growing your wealth, but if the world of investment is new to you, you may need the help of a financial advisor to guide you through the basics. However, hiring financial advisors is an investment in itself, considering you’re hiring a professional to manage your portfolio on your behalf.

But if you can’t afford a financial planner just yet, there’s a cheaper, and much simpler alternative: robo-advisors. They’re AI-powered financial advising systems that are specifically engineered to manage your investments for you.

What is a robo-advisor?

Robo-advisors function as automated trading and investing platforms for building and maintaining financial portfolios. Introduced to the public in 2008, they’re marketed as a tool to make professional money management more accessible to the public. In recent years, robo-advisors exploded in popularity thanks to their capacity of delivering a cost-effective and straight forward method of investing. With low fees and deposit minimums, new and experienced investors can enjoy a novel way of managing their investments.

How do robo-advisors work?

As mentioned, robo-advisors are based on automated systems. The investment strategies they offer centres on modern portfolio theory and efficient market hypothesis, and they use a carefully designed process to arrive at the most optimal way to invest on your behalf. This is why they are often used in financial trading and why they have become more reliable and widespread over time.

Those with brokerage accounts often choose to lean on these robo-advisors, as they use an algorithm to generate a personalized portfolio and manage it for you. They do this by calculating your risk tolerance, financial goals, age, profession, and income. However, by using robo-advisors, you sacrifice control over what securities you buy and sell and lose the opportunity to focus on one specific section. But the trade-off is that your money is often spread out across a market evenly since robo-advisors typically invest in low-fee ETFs.

The process is relatively simple too. All you need to do is sign up with your provider of choice and answer investment-related questions. The robot will then input your answers into an algorithm and generate the kind of portfolio and asset allocation best for your age, risk tolerance, income, and a litany of other factors.

Why do I need a robo-advisor?

It should be noted that robo-advisors are not for everyone. Unlike financial advisors, they don’t offer advice on other aspects of your financial situation, like diagnosing your financing issues or pinpointing areas for improvement. Human advisors will be able to direct you on how to improve your financial health rather than simply what to do. But robo-advisors are the ideal choice for entry-level investors due to their low fees and low-cost threshold, which means you will have more money to invest.

It also goes without saying that robo-advisors allow for a low-risk passive way of investing. Sometimes, even the most experienced financial advisors let their emotions tempt them into overtrading and making mistakes. With robo-advisors, their indifferent mechanical mechanisms work to focus on the long-term picture instead of short-term price movements.

For low-risk, passive income robo-advisors are now the best choice. In short: robo-advisors are an excellent springboard for building wealth.


Please enter your comment!
Please enter your name here