Friday Finance: robo-advisors

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.


While it’s cute to imagine a robo-advisor as an actual, 1970s sci-fi style robot sitting in an office, wearing an adorable tie around its thick, metallic neck, and giving you financial advice in a camp C-3PO voice, disappointingly it is just a glorified financial calculator.  You plug in your data through a survey and an algorithm spits out suggestions based on your circumstances.  These are sometimes called ‘automated investment advisors’ or ‘digital advice platforms’, but ‘robo-advisor’ sounds much cooler, so let’s stick with that.

Robo-advisors are generally very cheap, can offer advice even when you have very little money to get advice on, and are offering increasingly complex advice as the technology develops.  Unlike a human, they are available 24 hours a day so long as you have an internet connection.  They give you less flexibility than one of those old-fashioned humans because you usually can’t get advice on picking individual stocks and bonds, but I tried to talk you out of doing that anyway back in the last chapter.

Three of the biggest robo-advisors are Betterment, Wealthfront and Personal Capital.  There are many others.  Some of those online calculators I linked to earlier are kind of like mini-robo-advisors, in that they only complete a single function.  A proper robo-advisor will bring many such algorithmic processes together that will provide the investor with a more complete service.

Robo-advisors are unable to cope with unusual situations that are not written into their algorithms, nor are they yet able to cope with very complex arrangements that high net worth individuals might have such as tax or estate management.  Obviously they will not understand emotional issues that most human advisors will grasp more easily.

The robo-advisor is limited in how well it can survey customers.  For example, it will ask about your risk profile: low, medium or high?  First, that’s rather blunt to start with, and second, some investors will not understand what it means.  You’ll get it, because you’ve read Step 8, but others will not.

The verdict: robo-advisors may suit beginning investors who have fairly simple financial affairs and already understand the basics of investing.  In other words, precisely the target audience for this book, but only once you’ve finished reading it and have completed the initial steps.

If you really want to save money and won’t miss the human touch, consider using a robo-advisor to get you started in your investment journey.  Once you’ve built up some wealth and things are beginning to get complicated, you might want to upgrade to a meat-based application – unless by that time the technology has advanced so rapidly that the robo-advisor will still be good enough.  Who knows.

Also available on many other platforms.

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