Robo–advisor is a class of financial adviser that provides financial advice or Investment management online with moderate to minimal human intervention. It provides digital financial advice based on mathematical rules or algorithms.
What is Robo-Advisor
A new type of online software has emerged that can help you manage your investments. These software products are called “Robo advisors.” A Robo advisor can be a good solution for someone who does not want to hire a financial advisor, doesn’t have enough assets to hire a financial advisor yet, or for someone who has typically been a do-it-yourself investor, but no longer wants to select investments, rebalance, and place trades on their accounts.
Robo advisors can automatically select investments and build a diversified portfolio for you. Once your funds are invested, on an ongoing basis, the software automatically makes changes to the investments to align your portfolio back to a target allocation. Some Robo advisors even make trades automatically to help reduce your tax bill—a process called tax-loss harvesting.
How Robo-Advisor Works
Robo-advisors — also known as automated investing or online advisors — use computer algorithms and advanced software to build and manage your investment portfolio.
Services range from automatic rebalancing to tax optimization, and require little to no human interaction — but many providers have human advisors available for questions. Because they offer low costs and low or no minimums, Robos let you get started quickly — in many cases, within a matter of minutes.
Robo advisors have already taken a huge lead in wealth management industry with a lot of retail investors started investing their money with robo-advisors due to the benefit of transparent and low charges solution.
Types of robo-advisor
The algorithmic asset management offers various benefits. Which features individual private investors profit from depends on which type of robo-advisor they use. A distinction is made between full-service, half-service, and self-service systems.
The full-service robo-advisor takes cares of all aspects of the financial investment. It suggests an investment strategy to the investor, takes over the complete asset management, and independently takes care of the rebalancing to restore the original investment structure, if necessary. Serious full-service robo-advisors are generally registered as investment advisors with state securities authorities or federally with the SEC, and are required to adhere to all of the same security laws levied on all registered advisors. This allows the robo-advisor to manage your assets in much the same way as a human advisor would.
As the name suggests, this robo-advisor offers limited service. It acts as a broker for its customers, procuring investment products as part of an investment strategy, but as soon as the investment structure has to be adjusted (rebalancing) it requires the approval of the customer. So if you use a half-service robo-advisor, you’re not entirely giving up the management of your investments.
The self-service robo-advisor can be regarded as a kind of guide. It only gives the investor tips on the topic of financial investment. The investor has to do all of the asset management (opening securities accounts, purchases, sales, rebalancing) on their own.