Disadvantages of Robo Investors

Sep 22, 2022 | Investments, Markets, Savings

As online investment platforms become more popular, the traditional investment management industry is beginning to follow suit. Robo Advisers have become very popular in the past few years.

Instead of employing a human adviser (and paying for one) to manage your investments, these platforms use computers to crunch complex mathematical algorithms to automatically adjust your investments and create affordable portfolios. A hybrid investing platform combines expert insight with online management in some cases.

The easy calculators available on consumer-friendly websites are often the first stop for newbie investors at a financial crossroads. Get a projection of how much money you might save in a defined number of years based on your income, desired savings rate, and rate of return.

This approach may be suitable for low-risk goals. Online calculators can help you determine how much to save at a given rate of return to save for a down payment. With a given set of financing terms, the calculators can even show you what you may end up paying for a car. However, there are some disadvantages to using Robo Advisers that you should be aware of before making a decision.

Let’s discuss and outline the pros and cons of Robo Advisers so you can make an informed decision about whether they are right for you.

PROS

  • The small-balance investor may not have the time to research companies and invest in them. Online advice can point them in a direction that is best for their particular situation, helping these investors save valuable resources while still getting good returns on investments.
  • The use of online sites to track finances can establish a discipline that leads to budgeting and planning for longer periods.
  • Avoid human bias. A mathematical formula-based automated advising system eliminates that bias and determines where to invest or trade based on data, not opinion.
  • Save money. Typically, Robo-advisers are cheaper than human advisers.
  • While some Robo-advisors do require a minimum investment, many don’t and allow anyone to start investing. It democratizes investing so anyone can do it with no specialized knowledge or pre-existing wealth.

CONS.

  • Limited Flexibility & Personalization. Robo-advisors base their decisions on investing profiles, not you personally. This often means you are offered a handful of investing plans to choose among. In many cases, you can’t customize the plan.
  • Limited Human Interaction. Speaking with a customer service rep over live chat is not the same as speaking with a financial planner with decades of experience. For example, they won’t know about life changes unless you revise the starting date or remind them of the need to update starting assumptions, beneficiary information and savings rates as tax brackets, life relationships and salary compensation change.
  • It can be hard to get a handle on your overall financial situation. Robo-advisors cannot weigh the relative importance to each client of the various measures of risk, including liquidity risk, security risk, inflation risk, or market risk as measured by volatility.
  • They cannot factor in assumptions around complex tax reporting that may affect your investment decisions.

While Robo Advisers can be an excellent option for new investors, it’s important to be aware of their limitations. If you’re feeling overwhelmed by all the options or just want a second opinion, don’t hesitate to reach out to us. We can help you navigate these waters and make sure you end up with the best possible plan for your money. Thanks for reading!

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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Schedule an Obligation-free Call With an Adviser

By scheduling an appointment with an adviser they will reach out to you at your requested time. 
Personal advice, whenever it suits you.

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