Why robo advisors may not be right for everyone
Simply put, a robo-adviser is a business (or service) that offers investment management with minimal human intervention. These are digital platforms that will use complex algorithms to create investment portfolios for Simran based on the information they provide when creating an account. Since everything is automated, works digitally, and relies less on the decision-making skills of individual professionals, robot advisers can be great solutions for people who are just starting out, looking to grow their assets, and want to automate as much of the process as possible. They usually offer several pre-built portfolios that Simran can choose from, or can also allow him to build his own from a universe of ETFs and other mutual funds.
That said, an algorithm can make recommendations for Simran based only on the information it provides. This information can be limited to basic elements that can be quantified: age, proposed retirement age and where it falls on a spectrum from conservative to aggressive in terms of risk taking. These factors are important and should be taken into account when building an investment portfolio. But the real world is not black and white. It is much more nuanced than simple. Her financial goals are just as critical to making the “right” investment decisions as her age and how she feels about risk. An algorithm cannot assess this, nor provide it with advice on what to do with difficult, emotional, or subjective scenarios that will typically arise in real life. Roboadvisers don’t give any advice. They might have blogs on their websites, but they deliberately avoid giving specific recommendations to customers.
An app can be a great way for a young employee like Simran to get started with investing and can remain a good choice for them over time, but it could also get to a point where it needs more than just a simple app. algorithm to understand the optimal way to get the most out of your money and wealth.
(The content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava, and Labdhi Mehta.)