An Often Asked Question: “What Exactly is a Robo Advisor?”
Well, in simple words, it’s neither a robot nor a human investment advisor, but a sophisticated computer algorithm that selects investments and manages them for you over time.
In essence, a robo advisor provides a questionnaire to understand more about you, such as your financial goals, risk attitude and time horizon etc. The algorithm then suggests an automated portfolio that suits your profile. You can use a robo advisor as an investment account, for retirement, pay for a wedding or any other financial goals that you are aiming for. Often you will make monthly deposits to this robo investment.
After things are set, the robo advisor will automatically rebalance the portfolio according to your goals to stay within your chosen allocation. Before you start to invest anything, you may want to understand more to see if a robo advisor is for you.
Where did Robo Advisors Come From?
Robo advisors evolved from lifecycle funds and target date funds which were among the first to utilize technology for creating automated retirement portfolios for investors.
Robo advisors work differently in that they offer investors an automated portfolio with underlying assets, that will dynamically adjust from time to time depending on market situation. Some robo advisor portfolios are built with low-cost index and exchange-traded funds, which aim to outperform traditional wealth management by achieving cost efficiency and reducing human involvement.
Avoiding Human Error
Trading your own stocks is often challenging. Investors try to buy low and sell high, yet often this is not the outcome as people can make poor investment choices driven by emotions. Robo advisors take the emotion out of investing and can help people stick to their investment plan by making decisions based in logic.
Time Compounding Effect
You can make changes to your investments any time. Robo advisors may also be a good start for beginner investors because they offer relatively low investment minimums, which means you can start investing any time. The earlier you invest, the better as you will benefit from the compounding of your money when it is invested.
According to a MPFSA report, the average MPF account value in the Hong Kong for people upon retirement is only about HK$112,000* – so it’s wise to start a long-term investment plan for a financially prepared future.
How Much do Robo Advisors Cost?
So it comes to the last question: Cost.
Many robo advisors state their cost structure clearly up front and it is wise to check what you’re paying. While traditional financial advisors typically charge a fee of about 1% to 1.5%% of assets under management, robo advisors fees generally range from 0.5% to 0.8% of your assets. Robo advisors typically use low-cost index funds and exchange traded funds (ETFs) as investment vehicles, and the management fees from those ETFs issuers are normally cheaper than others.
However it is important to pay attention to the fees charged by robo advisors even if they seem low. Consider that a 0.5% fee would reduce an annual return from 7% to 6.5%. This difference may not seem like much, but over the course of time, these costs can add up.
SoFi Auto Invest
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Want More Investment Blogs?
Stay tuned! We will have more blogs on investing coming soon.
*Mandatory Provident Fund Schemes Statistical Digest quarterly report 6/2021
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