Andrea Azzola

Technology, Personal Development and Financial Independence

Robo-advisors, When Investing Advice Becomes Digital and Efficient

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Robot-advisors are software able to provide investment advices by operating through rebalancing algorithms. They can limit themselves to advice, giving the investor the duty and the freedom to manage the investment; or they can lean on some bank accounts to get the whole portfolio management automated. They guarantee the capital diversification, and can be fed through random deposits and dollar cost averaging (DCA).

About my experience

I found out about robot-advisors while I was extricating myself in the world of swing trading; at that time, I was studying and investing my first amounts of money. The results were pretty decent, but on the other hand I had to spend most of my time in analysis and following news, and I also realized that my modest capital was being poorly diversified. So, I decided to ask a professional for an advice.

Since I didn’t know what to do, I started, like many others did in the beginning, with Google: I found out about the independent consultants (fee-only) and then the robot-advisors. In the past, my knowledge as a developer already led me to think about some short algorithms to make a few calculations easier, to learn about firms that were able to diversify and automatically invest, but still with “bold” risk, by removing the human component of the equation; I got convinced to put my project aside and, temporarily at least, delegate the exhausting investments matter.

Pros e cons

The first benefit of robot-advisors is related to management costs. About a yearly 1-1,5% of the invested capital is due to the consultant, while the robot-advisor gets less than the 1%; traditional consulting firms require a minimum investment of about $50000, while some robot-advisors can even decrease down to $500.

This drastic decrease of costs is due to robot-advisors’ ability to work large-scale, by managing thousands of clients at the same time. So, the costs get reduced depending on the invested capitals, and then, there are some free robot-advisors that get benefits from extra services only. But, whereas traditional consultants work with a certain dynamism over the market, robot-advisors predict rebalancing mechanisms of cadenced or extraordinary investments, making them appropriate for those who’re looking for low reactivity solutions, so long term ones.

The second benefit is related to greater independence. Many of the robot-advisor firms were born in the fintech scenery and outside the financial monopolies, therefore they’re free to invest with creativity and in the best interests of the client. Although the “independent” system is present in the traditional consultancy too, through the fee-only system, robot-advisors’ higher accessibility made the entry level of the independence be within everyone's reach.

The portfolio management, then, takes place typically via web or mobile app; own investments can be looked up or edited 24h/24h. The apps let you build portfolios by customizing the level of risk and the asset class: if oriented, for example, towards the debenture, then more conservative and less profitable; if towards the stock and active management funds, riskier but with a higher potential profit. The main appeal of these tools, is obviously their ease of use.

Whereas the financial regulation permits it, like it happens in the USA, robot-advisors can get to optimize the payment of taxes, guaranteeing further savings. And naturally, like every other subject related to financing management, they’re institutionally regulated and supervised.

But robot-advisors, compared to the traditional consultancy, nowadays, are not able to satisfy highly customized necessities. Robot-advisors, then, are not really meant to replace the consultant function, but to work as alternative or supplementary investment tools, regarding the disappointing bank deposit, or the risky do-it-yourself approach.

Best robot-advisories of 2016

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