The Rise of Robo Advisors: Let Robots Invest for You
Updated: Apr 7
Speaking of investment, many of us think, how do we start investing and how can we get results from investing, because it is not an easy thing, it requires knowledge and even experience, especially in seeing markets that are difficult to predict. It is not uncommon for people to undo their interest in investment. However, as technology develops, now there are so-called robo advisors, the new financial technology for investing.
Robo-advisors (also spelled robo-adviser or robo advisor) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. So how do Robo-advisors work? Robo-advisors collect information from clients about their financial situation and future goals through an online survey and then use the data to offer advice and automatically invest client assets. That was amazing isn't it?
Robo advisors were first launched by Betterment (a fintech based company) in 2008. Their purpose in building robo-advisors was to rebalance assets within target-date-fund, a way for investors to manage passive, buy-and-hold investments through a simple online interface. Now, most robo-advisors put to use passive indexing strategies that are optimized using some variant of modern portfolio theory (MPT). Some robo-advisors offer optimized portfolios for socially responsible investing (SRI), Hallal investing, or tactical strategies that mimic hedge funds. So, everyone can include personal preferences in investing so that no one feels disadvantaged.
The main advantage of robo-advisors is that they are low-cost alternatives to traditional advisors, which by reducing human labor, online platforms can offer the same services at a fraction of the cost. Moreover, robo-advisors are also more accessible. They are available 24/7 as long as the user has an Internet connection. So, only with the material of a good internet, we can use these robo advisors optimally, wow, good isn't it. Furthermore, it takes significantly less capital to get started, as the minimum assets required for an account are typically in the hundreds to thousands ($5,000 is a standard baseline) but one of the robo advisors made by betterment has no account minimum at all, so everyone can start investing right now, but with the condition of having internet
There are now over 200 robo-advisors available in the U.S., and more of them are launching every year. All of them provide some combination of investment management, retirement planning, and overall financial advice. In Indonesia, maybe not many robo advisors are present in the community, but sure in the future it will grow and develop as technology grows. So don't be surprised if robo-advisors will “mold up” in the community. One example of robo advisors in Indonesia is Bibit.id.
As we can see, robo advisors help people, especially those who don't understand about investing, can become capable of doing it. Mostly, robo-advisors target beginner investors and especially Millennials. For example, Acorns. This corporation targets millennials as their target market, by giving perks in the form of a free fee to every college student up to 4 years. So this has attracted a lot of young people to start using robo-advisors
Robo-advisors mostly target beginner investors, and it is no surprise most of them are young or we can call them “young investors”. Since there are a lot of young investors surfing in digital financial advisor applications, robo advisors companies such as Wealthfront and Betterment are targeting themselves to the millennial generation. The reason behind why non-robo financial advisors, aka humans are having difficulty coping with these millennials is that they didn’t have enough assets. Also, they found human-based financial advisors too expensive. Robo-advisors come to a millennials image as a solution for cheap and easier options on helping or guiding them as a beginner investor, robo advisors automate trading decisions with neither human subjective intervention such as emotions and expensive fees.
But wait, the writer just realized that there is now a generation that is younger than millennials, it’s called the Gen-Z generation. Now, the question before we head to the next discussion is, whose generation uses robo advisors most?
As it is looked at in the data, Gen Z is the one who uses robo advisors the most, this is normal as the acceptance of digital advisors is increasing with each generation. The findings suggest that users of robo advisors are 2x as likely to manage their finances daily and this is what is also happening to these both Gen Z and Millennials generation, they tend to manage their finances but in this case, digitalized. Despite being called a cheap and simple financial advisor for a young investor, do they actually guarantee a return on their investment or at least have a higher percentage than human-based financial advisors?
Robo-advisors are newcomers compared to online but still “human-based” financial advisors. Early of this year, MarketWatch compared the portfolio recommendations of some of the top robo-advisors and human financial advisors. The results were shockingly different, for example, the Charles Schwab robo-advisor was the only one that recommended that a 35-year-old with $40,000 to invest should buy some gold and keep 8.5% of the portfolio in cash. This is a huge contrast with common investing advice or should we say, robo-advisor advice can go either way, completely right or complete disaster. This result concludes that young investors should do more research before choosing a robo-advisor.
Written by : Aldino Nabil Makarim, Aron Nathan Yehezkiel
Illustrated by : Aron Nathan Yehezkiel