It is a difficult task to plan your investments, as on hand you have to make a choice from the multiple available options and also choose the right investment plan. It is also important to monitor your investment and keep a track of it. Just imagine if all these were automated and you had not a chance to burden yourself life would be easy. In today’s world, automation is in every walk of life and Robo advisors are becoming the best source of managing wealth.
Working mechanism of Robo advisor
Robo advisor is a system-generated tool that gives digital financial advice to the user. It manages the investment portfolio and gives financial advice with reduced human involvement. Robo advisors are created for giving digital advisory services to the user, where the user will give inputs or instructions to the robo advisor and it will make its analysis and provide results to the user.
The advisory services provided by the Robo advisor are more often true and the design is simple: it asks a few questions, understands the requirements of the user and gives the output to the user.
The Robo advisors use algorithms to get the insights of the user. They predict the preferences of the user, analyze the risk, understand the needs of the user and provide prompting questions on the screen. A set of demographic questions & psychological questions create these portfolio models.
A basic profile is generated by the robo advisor as it will ask simple questions on name, gender, salary income, assets, liabilities, risk-taking capability and other details. The robo advisor will create a portfolio of the investor.
For deeper understanding and analysis there are advanced robots that use Artificial Intelligence and data. The financial data of the users is analyzed by getting to know their investments, bank information, credit card transactions, debit card transactions and other financial information. The financial profile of the investor is created by the robo advisor. There are advanced tools that are used for judging the financial behavior of investors.
The robo advisor will create a case profile of the user and suggest what they should do. The robo advisors will suggest based on the information available to them to the user. They will reveal data about higher spending estimates or reducing expenses, understanding liabilities and suggests in decision making.
Benefits of Robo-Advisors
The benefits of Robo-advisors include the following.
- Easily accessible
- Reduced human intervention
- Comprehensive services
- Track investments
1. Easily accessible
To get access to a robo advisor you just need to have an internet connection and the algorithm. Many robots are created in such a way that they are easy to use, simple and straightforward. The reduced stress of working with the robo is an advantage which makes it easily accessible than other wealth management advisors. These qualities give robo advisors the capability to create wealth management. It is capable of handling large amounts of data and it is accessible to more people.
2. Reduced human intervention
If the human resource is involved the advisory services may be biased but is not possible with the robo. Robo advisory services are free from human bias decision making. The most experienced advisors can also sometimes make mistakes but the robo advisors will not make any mistakes. When the robo advisor makes any analysis it will be a truthful and evaluated decision.
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Advanced robos go a step further which use Artificial intelligence and apply the mathematical algorithms for accessing the investor needs. The decisions given by the robo advisors are true and fair. There is no biased decision given as it is all system calculated data analysis and interpretation.
3. Comprehensive services
Entire financial planning is taken care of by the robo advisors which include services on retirement plans, tax saving strategies, understanding compound interest, balancing your portfolios and others. The robo system will manage your portfolio and they will ensure that you are on your goals track.
They will make sure that you will identify your goals and reach them systematically. They aim to reduce the liabilities with minimum human intervention and achieve financial goals.
4. Track investments
The robo advisor will create a profile where the user investments are summarized. The details of investments will be stored in the database and the user can track the investments. Based on the system data the robo advisor will build investment goals. After setting up the robo advisor account it will become responsible for nudging the decision makers.
The advisory decisions are provided to the user and they may be followed for better results. Long term investments on retirement plans, life insurance are ignored by the young-age investors. Robo advisors have a mechanism which is inbuilt and they follow it. Timely advice is provided to the user in quick decision making.
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Different types of Robo advisors
Robo advisors are categorized into three ways. Based on technical competency robo advisors are divided into simple robos and comprehensive robos. These are differentiated based on their technical capabilities, income generation structure and creative scope.
Simple advisory Robo services
Simple robo advisory services use the profile of the user and provide advisory services. There are questionnaires built in the system which will generate answers to the questions. They will provide advisory services to the users. The algorithms are designed for providing the services. The data about the investors is evaluated and portfolios are designed.
Comprehensive advisory Robo services
These Robots are inbuilt with Artificial intelligence technology which go beyond simple questionnaires. They cross verify the data, calculate the risk, make analysis, do an interpretation of financial statements and data. They will understand the investors profile and tell the actual net worth along withbehavioral spending patterns, current liabilities, current assets are mechanized and the user will get real time advice from the Robo.
Revenue earning Robos
Robos work on commission basis, strange but true. The manufacturer of the Robo designs the system in such a way that Robos earn money for their services. The user should pay an advisory fee for the services availed. The advisory fees can vary depending on the demand and supply ratio based on the number of users.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
