Robo-Advisors have been around for a few years and are already making a huge impact. Companies like Betterment and Wealthfront have transformed the way we now invest. The concept is simple an investor inputs some basic information about themselves like age and investment goals. Then the robo-advisor will place the investor in a fund or product based on these criteria. This is all done without any human intervention. In the past investors would meet with an investment advisor and they would look at their individual situation and make their investment recommendations. This would mean that the investor would be an individual of higher net worth since most IA’s come at a significant cost. Robo-Advisors have opened up the world of investing too many more investors.
Robo-Advisors use computer algorithms to determine how to create a portfolio for each investor. The lack of human interaction has one major advantage which is drastically reduced cost. Betterment has fees as low as 0.15% which is substantially lower than traditional advisory services. The lower fees and less intimidating approach has led to impressive growth. Betterment has over $2.5 Billion under management other Robo advisory firms have seen similar success. Even traditional firms like Charles Schwab and Fidelity have their own version of Robo Advisory services.
There are those that are critical of Robo-Advisors. These critics cite the limitations of the technology and having the ability to give advice. With the rapid growth of robo-advisors, it won’t be long before regulators will have a look at this new type of service. The SEC has already issued an investment alert advising of the limitations of automated advisory services. The lack of human interaction might mean that the investor is not receiving a complete assessment of their individual needs.
It looks as if Robo-advisors are here to stay. It will be of particular interest as for how regulators move forward. It might be that there will be a new classification of advisor and new guidelines to make sure that investors best interest is being adhered to.
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