As an investor, you may have heard of Robo-Advisor. It is a digital platform providing automated, algorithm-driven financial planning services with little to no human supervision.
A good Robo-Advisor usually offers easy account setup, robust goal planning, portfolio management, and security features.
How does it work?
Betterment, the first Robo-Advisor, launched in 2008, while it only started taking investor money in 2010. Actually, the technology is similar to automated portfolio allocation, which has been popular since the 2000s.
Today, most of Robo-Advisors use passive indexing strategies optimizing by some variant of modern portfolio theory (MPT). While some others offer optimized portfolios for socially responsible investing (SRI), Hallal investing, or tactical strategies that mimic hedge funds.
Its development has brought the ability to handle many sophisticated tasks. It includes tax-loss harvesting, investment selection, and retirement planning.
The industry has experienced exponential growth ever since. It has managed $60 billion worth of client assets at year-end 2015. Many experts also project it to reach US$2 trillion by 2020 and $7 trillion worldwide by 2025.
What are the benefits?
The biggest benefit of Robo-advisor is that they are low cost. They eliminate human labor, while still offering the same services at a fraction of the cost.
Also read: Investment Services with No Minimum Balance
Most of them charge an annual flat fee of 0.2% to 0.5% of a client’s total account balance. That is far lower than the typical rates of 1% to 2% charged by a human financial planner.
Besides, Robo-advisors are also more accessible. They are available 24/7. Its customers only need an Internet connection.
Furthermore, it takes significantly less capital to open a new account, as the registration of a new account in other financial planners could reach hundreds to thousands of dollars.
One of the most popular Robo-advisors, Betterment, has no account minimum at all.