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What is a Robo-Advisor?

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Whether you are trading on the forex market, stock market, or have any other kind of investment portfolio, there may come a time when you require the assistance of an expert service that can help you perform a number of key tasks. Where previously this may have been a job for portfolio manager or financial advisor, in today’s digital age much of this assistance can be provided by a robo-advisor. Here we will investigate this relatively new, quickly-evolving service to help you learn exactly what it is, and how it could become a key part of your trading journey.

What Does a Robo-Advisor Do?

In the most simple of terms, a robo-advisor is a digital platform or software that provides a range of services to help you best manage your portfolio. Very often, the services provided by a robo-advisor are completely automated and require no human interaction at all. A robo-advisor will typically engage a range of advanced software and computer algorithms to effectively manage your portfolio.

With the top-robo advisors, many of your key goals as an investor can be taken into account and the software can then use this data provided by you in providing a range of automated services to help you reach your investment goals. A robo-advisor may also be referred to using a number of other terms such as automated investment management, digital portfolio advisors, and other similar terms all referencing the increased demand for this kind of automated service.

Services a Robo-Advisor Provides

The overall goal of any robo-advisor you use may be similar. This is to fully automate a range of financial management services and help align your investment goals with strategy through the use of digital platforms and software. There are a few common services though that you will find with most robo-advisors.

Portfolio Rebalancing: The main feature you will find at the center of the majority of robo-advisors, is that of portfolio rebalancing. This can be done automatically or at set regular times such as quarterly, or bi-annually. This process is often fully automated through the use of software and is often continually tracked to ensure that your portfolio retains a set balance depending on your own selected risk profile and investment desire.

In short, portfolio rebalancing on a regular basis will ensure that your investments remain as optimized as possible depending on the market conditions and parameters which you can set.

Tax Management: Robo-advisors also often provide tax-loss harvesting, and other tax management tools which can help you manage your capital gains tax and other tax liabilities stemming from your investment portfolio in the most efficient manner.

Other Services: Depending on the robo-advisor you choose, there may be a range of other financial planning tools available as well as some hybrid services which can provide human consultation with financial experts in some situations.

As the robo-advisor industry continues to grow and evolve, so too do the services provided to you as a trader.

How Does it Differ From a Traditional Advisor?

Robo-advisors are revolutionizing the sector. While there are advantages and disadvantages to be discussed, there are really two key difference categories when it comes to using a robo-advisor compared with employing the traditional human advisor route.

Accessibility is the first key difference. Where a human advisor will have set times of availability, office hours, and other clients to manage through that time, a robo-advisor is typically available to use on a 24/7 basis. No need to call, no need to meet, you simply need to follow a few button clicks and your request can be carried out. Another example of where this ease of accessibility shines through is when you are utilizing the main robo-advisor feature of regular portfolio rebalancing. With a traditional advisor, this can be a cumbersome, time-consuming activity which can end in you incurring a large number of fees that can limit your upside. The automated nature of robo-advisors removes all of this difficulty.

The second key area where you will really notice a difference when using a robo-advisor, is cost. These are significantly reduced when using robo-advisors. While there are some key features a traditional in-person advisor can provide, it is generally accepted that robo-advisors have presented a value for money alternative that has been a game changer.

The Costs of a Robo-Advisor

We mentioned costs. As the market for robo-advisors continues to expand, an increasing number of services are competing in the marketplace which is making costs more competitive all the time. Typically though, you can expect an annual management fee of between 0.25% – 0.5% from the main robo-advisors. This is a big cost reduction from dealing with a traditional portfolio management service.

Further to that, transaction fees are usually waived by robo-advisors. This means that any buying and selling of assets in the portfolio rebalancing process is usually completed free of charge. This also would not be the case with a traditional service where you would likely pay commission and other transaction fees. Overall then, robo-advisor costs remain very low. An account minimum is also not normally required with the majority of robo-advisor services as it may be with a human service.

Who is a Robo-Advisor Suitable For?

A robo-advisor may be perfect for you in a number of cases depending on your situation. Here are some of the typical cases where a robo-advisor may be your ideal solution.

Starting Out: A robo-advisor is great if you are just starting out in the industry. You can remove a great part of the learning curve by letting the software do all of the work within parameters that you set.

Hands-Off Approach: If your situation is not to complex and you are happy to take a distant approach to your portfolio and the assets that are held in it, then a robo-advisor may be perfect for you.

Low Cost: If you have a lower portfolio value but still want to engage some assistance, or if you want to have your investments managed but in the most low cost, efficient way possible, then again, the robo-advisor is a solution that can meet all of these needs.

Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.