Instead of human investment advisors algorithms select suitable investments according to the specifications of the customer – The future of the financial industry?

Instead of human investment advisors algorithms select suitable investments according to the specifications of the customer – The future of the financial industry?

It all started in the USA in 2008 and named “Betterment”. Meanwhile, the American Robo Advisor manages more than seven billion dollars – and rising. Robo Advisor are mushrooming in the form of tech startups. Their goal: savers who are reluctant to deal with finances and prefer to do everything online, with the help of intuitive interfaces to invest animate.

While functionally similar software already existed in the 1990s, at that time it was only available to asset managers. Robo Advisor now allow the direct access to these functions by the end customer with the help of the Internet and should be an offer for everyone. The most important information about the digital investment assistant is given below:

Still the most widespread in the USA

Where it started, it is also the most prevalent: the USA’s technology affinity helped the Robo Advisor out of its infancy, turning former startups into well-known brands.

 

Active and passive Robo Advisor

Basically, the online investment wizards can be divided into two categories: “active” and “passive”. Regarding the passive Robo Advisors, the weighting of the different asset classes in the portfolio remains the same regardless of the market situation and it is only rebalanced at regular intervals. On the other hand, the assets automatically adapt the portfolio to the current market situation and thus adopt a dynamic approach. Both approaches monitor the portfolio to keep it within the risk area previously defined by the client.

 

The missing banking license

Robo Advisor usually do not have a banking license. Instead, they often operate in collaboration with a partner bank that manages and transacts the corresponding custody account in which the assets are held. In the corresponding bank, the invested money is a “special fund” and thus protected against outside access or in the event of bank insolvency.

Gradually, traditional banks and financial service providers are developing comparable, own offers. For example, the Swiss UBS with its “UBS Advice” (2015) or as one of the first German banks the Comdirect with the Robo Advisor “Cominvest” (2017).

 

Reduce costs with Robo Advisor

Robo Advisor can keep costs low by automating processes and using cheap investment products such as ETFs (mostly index funds). They therefore require rather low fees and can be used to invest smaller assets – often the minimum amount that customers can invest is less than € 10,000.

The online investment assistants depend neither on human intuition nor on emotions. The customer is recommended the seemingly most appropriate products and not the ones that bring the most commission. All decisions are taken on a purely factual basis and should therefore be less risky.

Robo Advisor boom! According to experts, globally-managed assets are set to rise to $ 500 billion by 2020 – the $ 100 billion threshold will probably be breached this year.

 

Disadvantage and risk

So far so good. Of course Robo Advisor also carries certain risks. For example, the machine has the disadvantage that it can not assess whether the customer is sufficiently informed, has understood everything and has allowed himself enough time to make a decision. Investors could overestimate their own knowledge and thereby acquire a rather inappropriate product for them. In addition, one should think well before using such an online tool, if you want to divulge such personal information on the Internet.

 

Investing without going into depth

All in all, it can be said: Of course, Robo Advisor are not perfect. But a facility should not be synonymous head over heels. And the necessary knowledge can be acquired very well in the digital age – sales calls, which are usually based on the interests of the bank and are difficult to understand, are no longer needed today. Those who want to invest without having to deal too deeply with the matter, should definitely take a second look at the Robo Advisor.

BACK TO OVERVIEW