How do you explain robo-advisors to customers?

Robo advisors allow an individual to more effectively allocate their money into a diversified investment portfolio that takes into account their risk tolerance (conservative to aggressive in the form for higher/lower stock/bond allocation) and their financial goals in an automated cost effective manner. What was once a tool you had to pay a financial advisor for you now can directly get access to utilize yourself. Plus its automated nature means for those without much time or experience can also enjoy its benefits with their long term investments. It’s not perfect but it does benefit those who don’t have access to a financial advisor or those who may be cost sensitive.

It’s really helpful for those set of customers who want tailored solutions which is backed by historical data and risk appetite. While, there are multiple factors which doesn’t solve the robots specially in the financial industry. Personal relationships gives more confidence along with sense of responsibility to attain the financial objective. While, mix of feelings( Data+gut) contributes better results in long term, as sometimes people vet on founders and their ideas not only on the balance sheets.

Robo-advisors are like money managers on your phone or computer. They use innovative tech to determine the best places to put your cash so it grows over time. You answer questions about what you want your money to do for you, and the robo-advisor takes it from there. Reasons to use Robo-advisors: - Save Money: Traditional money managers can take a good chunk of your investment as fees. Robo-advisors? Not so much. They're cheaper. - Always Available: You can check in or make changes from your phone. - Smart Choices: These robo-advisors are built to make choices based on data, not gut feelings. That's usually a good thing for your money.

Robo-advice is a digital platform that uses algorithms and technology to offer customized holistic advice. By merging the knowledge and expertise of financial advisers with the efficiency of automation, robo-advice provides you with tailored recommendations. These recommendations are based on a comprehensive fact-finding process, which ensures that a holistic view of your goals and objectives is taken into account, provided the scope permits. This process considers factors such as your financial goals, risk tolerance, time horizon, and other relevant information. The primary objective of robo-advice is to make access to both strategies and product advice more accessible, cost-effective, and transparent for individuals.

We use direct indexing in our practice and some could consider the concept as “robo-advising” since algorithms make a large contribution to the investment decision making process. Candidly, in a very complicated and technological marketplace, it helps to have computers sort data quickly. It allows portfolio managers to be bionic. Have you used ChatGPT? If so, you know how having a tech enabled assistant can speed up and improve workflows. This is how I’d discuss robo-advisors with our clients.

While some people might argue that having no emotions, less biases or conflicts of interest is good, I believe this view is not quite accurate. Let's start from the beginning: why might someone want to use a robo-advisor? Typically, the decision implies an intent to manage one's wealth. Wealth management is a sophisticated concept, involving not only financial assets but also life goals, behavioural traits, and personal experiences. To an extent, it is rooted in emotions because they bring 'vitality' to life.Therefore, an adviser who can offer analysis incorporating an individual's life story, motivations, and emotions could potentially outperform an AI that neglects to take these elements into account.

Working with technology is great… but working with a person who can empathize with and navigate the situation properly is the best course of action. My company doesn’t charge clients to sit down and work through their financial decisions and we find product with minimal fees involved to begin with. Being non-captive has that advantage, and we are available whenever our client needs it.

Robo Advisors are a tool for Financial Advisors to use to make the client experience more efficient. A robo advisor can get money invested for clients, rebalance and reallocate funds to a predetermined mix of investments. They make the investment process more streamlined, however, this does not always lead to better performance for the end user.

Here is the challenge. 85% of Americans have chosen NOT to work with a financial advisor (Fidelity Institutional). Is it because of cost or is it because the majority was uninspired? If the humans have failed the “soft skills” of selling the public they need help, how will an algorythmic machine do with this task? Not well!

The 3 biggest differences are: 1) Fully automated: For those who don't have much time to manage their investments or not much knowledge in this area, robo advisors can help bridge this gap. 2) Accurate/not biased: Relative to human advisors they can be relatively more accurate given their ability to make complex calculations and they are not swayed by emotions/biases. 3) Cost effective: Robo advisors generally charge less than 1% relative to human advisors who will charge more. Naturally this is not an apples to apples comparison since human advisors can offer things such as an empathetic support when markets are down, handle a wider range of investment/financial needs and the trust people need to have someone manage their money.

The main benefit of a robo-advisor is that they charge lower fees, although a broker that provides a robo-advisor to its clients may decide to offer additional perks and features as well.

The 2 major benefits for robo advisors are: 1) Automated 'guided' investing: For those who don't have much time to manage their investments, not much knowledge in investing or restrictions in what they can invest in (like employees at financial institutions), robo advisors can help offer the guidance they need for their longer term diversified investment (especially if they don't have access to a human advisor). 2) Cost effective: Robo advisors generally charge less than 1% relative to human advisors who will charge more. Investors should be aware that fees really matter. E.g. If you invested $100K (assuming 6% return) for 40 years a 1% extra fee can be the difference between earning $1 million vs $700K ($300K difference).

Humans make mistakes, machines can make blunders! While working with Robo- Advisors, it is still important for the customers to apply their layer of common sense. Perception is reality! The role of a financial advisor in my opinion is give confidence to investors & not really about just helping them choose the right investment vehicle. Will humans develop enough trust in a robo-advisor is anybody's guess

Robo-advisors often select a default portfolio for you by asking a few basic questions about your comfort with risk and your need for money in the near future. It's unlikely that they'd be able to provide useful advice to help you deal with more complex situations.

The 2 biggest drawbacks I would say are: 1) Less flexible: Robo advisors right now mainly help guide longer term diversified investment portfolios. They take in account your background and tolerance for risk to make an investment recommendation but this has its limitations. It can't 'read between the lines' for your investment needs and it may not allow major changes to your portfolio over time. If you had other investment/financial needs like pick stocks for you or do your families estate planning robo advisors will unlikely be able to do this. 2) Human touch: Unless they offer human advisors in conjunction (hybrid service) investors may feel robo advisors may need more human touch particularly when markets are volatile or down.

Many are based on overall market risks and rarely look beyond your personal portfolio or cash flow goals. Many could improve by: A) Handling rebalancing better (e.g. not rebalance just before a big cash flow event is due to happen) for fully individual portfolios. B) Take deeper individual looks at risks - where it's the client structurally overexposed (e.g. through their job, housing situation, other cash flow streams, business ventures)? These are easy for an advisor to look at, but I expect robo-advisors to meet these needs in the next few years.

You choose a robo advisor much like you would choose any investment manager based on: 1) Whether you comfortable having a machine manage your money or automating a portion of your investments 2) It's performance track record 3) Whether the robo advisor is backed by reputable companies/managers 4) Whether it meet or address your investment needs (since some robo advisors may be built differently) 5) Are the fees reasonable 6) Whether the robo advisor platform has other solutions so you can 'grow' into them as you become more experienced

An analytic can appreciate the access to information and the low cost to access it. However, people who have different social styles might need the human interaction that helps them tie their investment decisions to funding their children’s college education, their weddings and their retirement. They need a sounding board for strategic planning. A robo-advisor can’t do that.

I'd say that you should also research the broker that's offering the robo-advisor service. Is that broker trustworthy and reliable, and does it treat its customers well? It's not just about the features the robo-advisor offers.

Explaining robo-advisors to customers? Picture it as a Financial GPS. You input your financial goals and risk tolerance, much like entering a destination and preferred route. The robo-advisor, using algorithms and real-time data (the GPS satellites), navigates the market’s twists and turns, offering directions (investment advice) to keep you on the right path toward your goals. And much like a GPS re-routes when you take a wrong turn, a robo-advisor adjusts recommendations based on market changes and personal preferences, ensuring a smoother journey to financial success.

Robo advisors are built on the idea that the system, as it stands now, is functional. It is not! If 85% of Americans have chosen not to work with a financial advisor, there is something wrong- but there is also an incredible opportunity! For example, do risk profile questionnaires accurately identify an investor’s risk tolerance. No! The same family who is asked these questions in 2023 and in 2020 will give completely different answers to these questions based on their feelings at that time. Remember, all future allocations are based on THIS profile. How about the concepts of budgeting or net worth? All of these concepts are broken, which means the advice received from a robo-advisor could be wrong as well.

One major thing that I find missing in Robo-Advisors is that while creating a risk profile of a customer, they tend to take into consideration the current scenarios on which all the reccomendations are provided. What is not factored in, is the evolving personal-finance scenario of the said customer and factoring the same in the long term investment recommendaction. Also a rule of them should he to refresh the customers risk profile regularly so as to factor in the most recent risk appetite and rebalance the existing portfolio if needed while risk-adjusting future recommendations.