Who are Robo Advisors?
Robo advisors are just what they sound like. They are algorithms which make advice style decisions based on certain rules.
E.g if Jim is in debt don't offer him more loans or if Tom is more Risk averse, do not invest his money in Bitcoin
Robo advisors consist mostly of investment platforms and recently of more traditional advice such as mortgages and debt.
You give a robo advisor information about you such as your age, risk tolerance, future plans, Goals,current circumstances and any other relevant preference. The Robo advisor can then provide you advice and invest your money on your behalf.
How do Robo advisors work?
Robo advisors typically will put your money in index funds, tracker funds and ETFs. You can learn more in this in our investment basics lesson.The humans behind the algorithms will regularly make changes to your portfolio based on economic or political activities but generally the algorithms make the trades.
Robo advisors have simply built technology that allocates your assets(stocks) much better in relation to your risk, goals and the other information you provided to the robo advisor Asset allocation is essentially specific to everyone as your goals, risk, funds etc are all different.
Asset allocation in Robo Advising
Asset allocation is basically a strategy that tries to reduce your risk of losing money and increase the potential of you making money. This is the main focus of robo advising. The algorithms are trained to allocate your money based on your risk profile and the market risk.
Advantages of Robo Advisors
Robo advisors have a huge advantage as they are cheaper and you can start investing with a very low amount. The regulations surrounding robo advisors haven't changed. So there isn't extra regulatory protection with robo advisors and your money is just at risk of going up or down as it is with a traditional advisor.
The drawbacks of Robo advisors
Robo advisors can help you with some things today but not the most complex of financial advice such as retirement planning or estate planning.
Robo advisors also leave so much control in your hands and make you more prone to making bad decisions such as withdrawing your money in a time of crisis rather than leaving it there.
However you can always contact your robo advisor and get more traditional advice.