What Is Robo-Advisor And How Does It Work?
One of the most frequently heard innovative tools, especially in the field of finance, in recent years is robo-advisors. Thanks to these tools, customers can access the tips they need regarding investment projects. Robo-advisors are usually artificial intelligence-supported platforms and work with algorithms to help users in many financial matters.
They can analyze users’ financial history and recommend suitable investment projects. Financial institutions evaluate the most ideal investment project times by recommending financial goals by risk tolerance thanks to these tools. Investment portfolios where all control is in robo-advisors are much more profitable than those managed by manual human control. Because they can balance portfolios according to current market conditions with diversification in investment portfolios.
Since many financial processes, from daily banking transactions to more complex investment projects, can be managed more practically thanks to robo-advisors, I foresee that many customers from almost every customer profile will demand service from robo-advisor platforms shortly.
What Are The Benefits Of Using A Robo-Advisor For Investing?
Whether you are a professional or beginner investor, robo-advisors will have many benefits for you. I can list the most critical benefits as follows:
- Minimized costs: Investors can manage many cost and budget-requiring processes such as consulting with much lower fees thanks to robo-advisors. In traditional investment consulting, monthly or annual fees are charged at certain rates on both the income and the consultancy. Moreover, professional investment consultants can become a prominent expense item for high-value investment portfolios. However, transaction fees or subscription fees are much lower in these digital tools.
- Practical access: It is quite easy for beginner investors to reach or access such platforms through online channels. To access traditional investment consultancy, you have to evaluate your network or some advertisements/campaigns. However, thanks to digital investment tools such as robo-advisors, being online will be enough to access all services.
- Automated investment portfolios: Automatic balancing of investment portfolios according to different market conditions is a great advantage. While in traditional investment consultancy, almost every transaction continues with your approval, in robo-advisors, the risk is reduced to zero thanks to automated orders and you can spend less time.
When comparing investment projects managed with traditional methods and those carried out with the help of robo-advisors, it will be understood that projects managed by robo-advisors are much more profitable. Moreover, no matter what level of investor you are, your investment process becomes easier.
How Does A Robo-Advisor Compare To A Traditional Financial Advisor?
To better understand robo-advisors, one of the most profitable banking technologies of our age, it would be right to compare them with traditional banking methods. When comparing a traditional financial advisor with robo-advisors, the following differences can be listed:
Robo-advisors work with algorithms while managing automated investment portfolios. However, personal recommendations in traditional investment processes include a margin of error. Moreover, professional-level investment recommendations are subject to a fee.
Robo-advisors are accessible for a much more reasonable fee compared to professional investment recommendations. In this way, it is possible not only for professional investors but also for beginner-level investors.
Unlike these, traditional advisors can understand special and unique conditions and human factors more appropriately and realistically than robo-advisors. This can facilitate taking more accurate steps in investment processes. However, when looking at the statistics in general, I can claim that robo-advisors manage more profitable investment portfolios in the medium and long term thanks to keeping emotional reactions away.
Can You Make More Profit With A Robo-Advisor?
Of course, the investment portfolio you manage through a robo-advisor will earn you income. You will be managing an investment project for a much more affordable fee than traditional professional investment consultancy, and you will need to spend much less time because it is automated.
Although profitability is not always guaranteed depending on market conditions and investment type, sometimes there may be more profitable investment projects with the strategies offered by traditional consultants. However, it cannot be predicted that any investment project will be 100% profitable.
However, in the medium and long term, investment projects managed with robo-advisors are almost always more profitable than traditional investment processes that involve a margin of human error. Therefore, I can easily answer the question of whether it is possible to make money with a robo-advisor, “Yes.” Moreover, it is even possible to turn it into a regular income with suitable market conditions and capital.
How Does A Robo-Advisor Personalize Investment Portfolios?
Traditional investment advisors, unlike robo-advisors, can analyze special and unique conditions more accurately and suggest more effective strategies by taking human conditions into account. However, robo-advisors can also offer personalized investment portfolios with algorithms and artificial intelligence tools. This situation is increasingly managed in an advanced way.
So how do robo-advisors personalize investment portfolios? The answer to this question is very simple. People or institutions who are traditional investment advisors personalize their investment portfolios with the help of some data. Robo-advisors can sometimes offer more complex and personalized investment processes than traditional investment advisors. By analyzing personal data and data in a more accurate and risk-free way than traditional investment consultancy, these digital advisors can offer more successful investment strategies in terms of personalization.
Robo-advisors, which are one of today’s advanced technologies, can analyze data such as users’ risk tolerance, financial history, possible financial goals, and current capital more technically and more successfully through algorithms without any margin of human error, just like traditional banking tools. In this way, it ensures the formation of investment portfolios with the highest profitability rate.
What Are The Costs Associated With Using A Robo-Advisor?
Robo-advisors, which are accessible through many financial platforms, are mostly not free. However, I can claim that they have a very low cost compared to traditional investment consultancy services. Thousands of professional investors from different parts of the world ask professional investment consultants questions about which investment types they should evaluate their assets in and continue their investment projects in return for certain transaction fees.
However, transaction fees are generally much lower in investment portfolios managed with robo-advisors. Although their annual fees are usually around 0.30%, different institutions will have different suggestions. It would not be right to consider the costs of robo-advisors only based on their annual fees. The effort and time we spend in the traditional investment consultancy process are also factors that will indirectly make us more profitable thanks to robo-advisors.
Sometimes investors may want to get consultancy regarding human factors and share their troubles with a human while receiving consultancy regarding investment projects. Unfortunately, it is not possible to get efficiency from robo-advisors yet. But who knows, maybe in the near future, with the development of artificial intelligence, this may also be possible.
Who Should Use A Robo-Advisor For Their Investments?
It doesn’t matter what level of investor you are or how much assets or wealth you have to use a robo-advisor. Digitized investment ecosystems offer many solutions and tools not only for professional investors but also for beginner-level investors. Our modern investment assistants, robo-advisors, can be life-savers, especially for beginner-level investors.
When we receive traditional investment consultancy services, high cost, effort and time are factors to consider. However, thanks to robo-advisors, beginner-level investors can manage automated investment portfolios by receiving low-cost consultancy and spending less time.
It would be quite logical to benefit from robo-advisors not only for large-scale investment portfolios but also for small-scale and education-focused investment projects. Since they are tools that work with algorithms, they will also prevent you from implementing a strategy that is against your risk tolerance.
Although the risk in investment portfolios managed with robo-advisors is lower than traditional ones and requires less time, it is still recommended to receive a basic level of training for management. At least you can use demo accounts for a certain period of time to master the interface. Today, thanks to online resources, it is possible to access educational content on the use of these types of robo-advisors on many platforms.
How Secure Are Robo-Advisors And Your Financial Data?
In traditional investment consultancy processes, your personal identity information and confidential information about your assets and wealth are also shared with the consultancy institution. No matter how reputable and reliable your investment portfolio is, it is normal to be concerned about the security of your data. However, thanks to robo-advisors, which are a solution for digital banking, you do not have to worry about data theft.
Today, many robo-advisor platforms continue to operate within security protocols. However, investors who are still concerned about the privacy of their data and assets should also take personal precautions. There may be a security breach regarding your data if you receive robo-advisors or other investment services through a financial platform that is not reputable and trustworthy.
Platforms, where robo-advisors are offered, should generally be used with double verification methods and strong passwords. However, it is useful to remember that digital banking methods and tools are much more secure than traditional financial solutions. You should test the compliance of the platform from which you will receive a robo-advisor service with legal certificates and security protocols.
What Are The Most Popular Robo-Advisor Platforms In 2024?
While many financial institutions did not have robo-advisor services in the past, many institutions now offer robo-advisor services thanks to advanced artificial intelligence and algorithm technology. Although Betterment and Schwab Intelligent are among the most common robo-advisors of 2024, you can safely use robo-advisors offered by many reputable and reliable financial institutions.
The most ideal robo-advisor platform for you may vary depending on the country you live in, the assets you own, and the type of investment you are interested in. Before you get a robo-advisor service, you should research the platform that is most suitable for you.
Many digital banking platforms offer robo-advisors, which you can use in the form of a mobile application or website, for reasonable fees. Among these, you should determine the annual fees, and services that are most suitable for you and your financial goals, and evaluate the feedback of negative customers.
How Does A Robo-Advisor Optimize For Tax Efficiency?
Robo-advisors, which offer solutions to almost every need regarding our financial needs and investment processes, also contribute to tax efficiency. While automated investment projects generally aim to achieve financial goals through a tool called “tax loss harvesting”, legal and periodic payments such as taxes are also automatically tracked in this process.
When you receive service from a traditional investment consultancy, you are expected to pay extra fees while receiving consultancy and tracking services regarding your regular payments such as taxes. However, there will be no surprise expenses in your financial situation that you manage with robo-advisors. Algorithms calculate your periodic payment obligations on your behalf.
For many professional investors, taxes are a periodic financial obligation that must be taken into account, so having robo-advisors reduce your tax liability can be a great help.
What Are The Common Mistakes To Avoid When Using A Robo-Advisor?
While using robo-advisors in investment processes, some common mistakes can be made by both beginner and professional investors. I can list the most common ones as follows:
- Incorrectly assessed risk tolerance and wrong strategies implemented as a result
- Focusing on short-term profitability and engaging in practices contrary to risk tolerance
- Not having sufficient knowledge and equipment regarding market conditions and investment type
To avoid these common mistakes, you should determine your risk tolerance correctly and realistically without thinking about market conditions in the short term and avoiding emotional reactions.
It is also one of the most common mistakes of beginner-level investors to leave all control to robo-advisors. Although there are risk-free tools that manage their investments with algorithm-supported systems, it would not be wise to leave the control completely to the robo advisor.
I predict that shortly, with the help of technologies such as artificial intelligence and machine learning, almost all professional investors will use robo-advisors and leave operations and strategies entirely to these tools.
See you in the next post,
Anil UZUN