Do you want to start investing but don’t have the money to shell out for a financial adviser? Getting professional financial advice can be expensive and a financial planner may not be worth the cost if you’re not planning to invest a big amount of money. 

This is where robo-advisers might come in handy. Robo-advisers are digital financial advisers that use advanced technology to offer low-cost investment management services. And a lot more people are taking advantage of this technology. According to a study, a higher percentage of young Aussies are using robo-advisers to reach their long-term saving and retirement goals. And as the market continues to grow, we can expect the range of services offered by these platforms to also expand. 

But what exactly are robo-advisers? If you’re not in the loop, don’t worry. In this article, we’ll discuss what these platforms offer, how they work and whether they could be a good fit for your  investing strategy. 

What is a robo-adviser? 

Robo-advisers have been around since 2008 in the US but have started gaining traction in Australia in 2014. A robo-adviser is an online platform or application that uses algorithms and softwares to create a financial plan and automatically manage investment portfolios for clients. It is also known as an automated investing service or digital financial adviser. 

Now you might be asking, how do robo-advisers exactly work? Each platform operates differently, but investing through a robo-adviser generally starts with a questionnaire. It will ask you about your overall financial situation. This includes your goals, income, timeline, risk profile and how much you have to invest. Pretty much anything that will affect your investment plan will be asked (e.g. retirement plan). 

Your answers will be processed using an algorithm to provide you with an asset allocation strategy and create a portfolio of diversified investments that will meet your goals. Then, the robo-adviser will pair you with a curated portfolio that will match your needs and preferences.

Robo-advisers cross out a lot of tedious tasks in the to-do list of a beginner investor. In the past, if you want to invest but you don’t want to hire a financial adviser or a wealth manager, you would need to do your due diligence, do a lot of research, pick out your investments and do all the buying and selling yourself. A robo-adviser’s work doesn’t end with creating a diversified portfolio. Once you’ve opened the investment account, the robo-adviser will then continuously monitor your portfolio.  

What services do robo-advisers offer?

Robo-advisers offer a wide range of services that require little to no human interaction. They can assist you with everything from investment selection, superannuation fund management and retirement planning. At the minimum, you can expect robo-advisers to:

• Rebalance your portfolio. As the individual assets in your portfolio rise and decline along with market trends, robo-advisers will look for opportunities to buy and sell your investments. It will also make sure that everything is in proportion to help keep you on track to achieve your goals. Rebalancing portfolios can be done either automatically or at set intervals (e.g. quarterly). 
• Provide financial planning tools. Some robo-advisers provide access to digital financial planning tools, including retirement planning tools, loan calculators etc. 
• Tax-loss harvesting and other tax-strategy offerings on taxable accounts. Automated tax-loss harvesting is offered by almost all robo-advisers. It involves selling certain assets (individual stocks, bonds, mutual funds, index funds) that have incurred capital losses to offset capital gains on other investments, thereby reducing your overall tax liability at the end of the year. 

What are the pros and cons of using a robo-adviser?

Robo-advisers offer a number of benefits to investors, but there are also a number of reasons why these platforms are unlikely to take over human financial planners. 

Advantages of robo-advisers

• Low cost and easy access – Robo-advisers are significantly cheaper than having a traditional financial adviser actively manage your investments. Because robo-advisers usually invest in index funds or exchange-traded funds (ETF), they typically charge lower management fees, which can translate to higher returns for investors in the long term. Unlike traditional portfolio management services that often require high balances, robo-adviser-managed accounts usually have no account minimum balance requirements. This makes financial advice accessible for the majority of people.  
• Eliminates human error – When it comes to investing, emotions can either be a blessing or a curse. But any seasoned investor will tell you it’s a big mistake to let your emotions control your investment decisions. By using a robo-adviser, the human emotion and irrationality will be removed from the equation and your investment decisions can be based purely on data and figures. 
• Strategic and timely decision making – Aside from saving you time and effort, robo advice may help you make timely investment decisions by providing reminders when you hit certain investment milestones or targets. 

Disadvantages of robo-advisers

• Impersonal – Unlike a human financial adviser, robo-advisers lack a certain ‘personal touch’. They can’t sympathise with your personal circumstances and they will not be able to adapt as much to your life changes. While many robo-advisers enable you to set and edit your goals using their financial planning software, you also have money-related problems and concerns which may be resolved with a chat with a human being. If you want or need more comprehensive financial planning, or you’re not sure if you want to leave your portfolio in the hands of a computer, you might be more interested in online financial planning services.

• Lack of insight – Robo-advisers can’t discern a number of potential risks on the horizon like human financial advisers can. These include housing bubbles, RBA rate changes, market crashes, recession etc.  

• Lack of range of services offered – Many robo-advisers don’t offer the full range of services that are typically offered by a financial planner. For example, robo-advisers can’t help you with estate planning and tax planning. They will also not be able to help you with a broad range of investment options and other financial products.  

Are robo-advisers for you? 

When you’re the new kid on the investing block, don’t have much money and want to have access to sophisticated and data-backed investment advice, a robo-adviser can make a lot of sense. Robo-advisers are fantastic tools to use if you want to invest but have no experience and no idea where to start. 

But as your portfolio grows and the time horizon to your biggest financial goals (like comfortable retirement or a sufficient nest egg for your post-work life) becomes smaller and your financial life becomes more complex, it might not make sense to continue working with a robo-adviser. Investing for the long term and growing your wealth will require the guidance of a qualified financial adviser. At this point, you might want to start working with a human financial planner who can help you stay on track with your financial goals.