A Robo-advisor is a digital platform that can provide automated financial planning services driven by algorithms.
One of its benefits is that it can be used with little to no human supervision, making it a great idea to generate passive income.
This article will explain what a Robo-advisor does and weigh the pros and cons of using one.
How can a Robo-advisor generate passive income?
At its core, a Robo-advisor’s job is to develop an automated trading system. It collects information from clients to glean their financial situation and goals.
Then, it uses the data collected from the online survey to offer a financial investment plan that suits the client’s needs.
When choosing a Robo-advisor, consider the following:
- Account services
- Attentive customer service
- Comprehensive education
- Easy account setup
- Low fees
- Portfolio management
- Robust goal planning
- Security features
Robo-advisors charge fees, but they are considerably lower than more conventional financial advisors. Your money is invested in portfolios that are specially chosen, low-fee exchange-traded funds.
The first Robo-advisor was launched in 2008 but only started taking investor money two years later in 2010. Their original purpose was to allow investors to manage passive, buy-and-hold investments using a simple interface online.
The job of a Robo-advisor and the technology used is not something new that has come to the investment table.
Before the release of a Robo-advisor, the only people who could use technology similar to it were human wealth managers. Its launch just opened up the gates and allowed the general public to try it out.
Since its release, they have been adapted to handle sophisticated tasks like investment selection, tax-loss harvesting, and retirement planning.
By delivering the service straight to consumers, modern Robo-advisors have changed the investment narrative.
Pros of using a Robo-advisor
#1: Offers more financial advice for the market
Consumers with a lower net worth often invest without consulting anyone for professional financial advice.
This is because a financial advisor could cost more money and may not be as easily accessible as a Robo-advisor.
Thanks to Robo-advisors’ rise, more and more people are gaining access to lower fee models that allow them to manage their financial assets more professionally.
#2: They adapt to every client’s goals
Robo-advisors ask clients to fill out an online survey that details clients’ current financial status, their financial goals, and how big of a risk they want to take in investing.
Then, it uses this information to formulate an investment plan. Some Robo-advisors even offer other features such as tax-loss harvesting and rebalancing.
Some Robo-advisors specialize in offering diverse idea-based portfolios, and some Robo-advisors offer low-fee ETF portfolios if your primary concern is rock-bottom fees.
#3: Low minimum balance
Investors who have a small net worth have access to some Robo-advisors’ financial management for little to no minimum balance at all.
Robo-advisors such as Betterment, Folio Investing, and Wise Banyan can get clients started investing with zero minimum balance.
Other Robo-advisors may require a fee of $1,000 to $5,000 to get the clients started.
#4: Low fees
Before Robo-advisors were introduced, it was considered lucky if they managed to receive investment assistance that was professionally managed and cost less than 1% of AUM.
Robo-advisors have changed that. There are plenty of Robo-advisor models that offer low costs for the cost-conscious consumer.
#5: Robo-advisors use Nobel-Prize winning investment models
Robo-advisor algorithms rely on investment theories that have won Nobel Prizes to drive their models.
#6: Financial advisors highly recommended them
Financial planning practices have grown to accommodate Robo-advisors because of how good the Robo-advisors are in selecting the client’s best assets.
This allows the financial advisor more time to discuss non-automated processes such as issues in financial planning, individual task, and estate.
Cons of using a Robo-advisor
#1: They falsely claim that they are the only option for beginners
While Robo-advisors are a great starting point for anyone who is just getting into the market, they are not the only option.
There are alternatives to a Robo-advisor that may be more suited to a client’s need to meet face-to-face. It is, after all, difficult to use an interface when you don’t know what’s happening.
Some alternatives to a Robo-advisor can offer an hourly rate so that beginners can start slow before building up to higher investments.
#2: You can’t meet with a Robo-advisor face-to-face
Some people prefer forming a relationship with their financial advisor that is built on trust. After all, clients place their financial assets in the hands of financial advisors.
This is not an option for Robo-advisors.
#3: Robo-advisors bash the price schedules of other advisors
Not all financial advisors are expensive. Some financial advisors charge 1% of AUM for their services, which is almost similar to other Robo-advisors’ costs.
Financial advisors can even offer hourly rates for their service so that clients can cut costs and limit their use.
#4: They aren’t as personalized as you want them to be
Although there are numerous options to choose from to make your Robo-advisor more attuned to your needs, the bottom line is they cannot provide emotional support or advice when it comes to issues like market drops.
Robo-advisors cannot explain how investment markets work, nor can they help you deal with your fears.
Conclusion
Robo-advisors have only been around for less than 15 years. There is still more room to grow, and thanks to the rise of digital technology, they will continue to do so.
One of the Robo-advisors’ primary benefits is that it lowers fees, inviting more consumers to try out investing. It makes considerable efforts in providing financial advice.
They are an excellent option for generating passive income, but they are not the only option for choosing a financial advisor.
It is recommended that consumers choose a Robo-advisor or financial professional that suits their trading style to get the best type of guidance they need.
PROJECT DESCRIPTION: Robo-advisors have been on the rise recently, but are they that great at generating passive income? This article lists the pros and cons.
