What is a robo-adviser?

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In an era marked by rapid technological change, financial management has also undergone significant changes. One notable development is the emergence of robo-advisers, automated platforms that offer investment and financial planning services.

How do robo-advisers work?

Robo-advisers are online platforms that use algorithms and computer-based models to offer financial advice and manage investment portfolios. They have made wealth management accessible to more people, but you might not be able to choose, or avoid, specific investments.

When you sign up for a robo-adviser, you will fill out a questionnaire answering questions about your personal and financial information, for example your salary and appetite for risk. Based on your answers, the robo-adviser will often invest your money in Exchange Trade Funds (ETFs) and mutual funds.

If you’re saving for retirement, the robo-adviser may suggest portfolios with long-term growth potential. If you’re investing to grow your money for a mortgage or to have the funds to spend sooner rather than later, the robo-adviser may steer you towards short-term growth options and play it safe by following bonds with lower risk and a solid stock market index.

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

Pros of using a robo-adviser Cons of using a robo-adviser
Convenience: With a few clicks, you can open an account, set your financial goals, and begin investing. Robo-advisers handle portfolio management, rebalancing, and tax optimisation, simplifying the investment process. Limited personalisation: Robo-advisers rely on algorithms and data, and lack the subjectivity required to offer fully-personalised services, tailored to an individual's unique financial situation, goals, or risk tolerance.
Accessibility: Robo-advisers are easily accessible via online platforms and mobile apps, making it convenient for investors to manage their portfolios 24/7 from anywhere in the world. Lack of human touch: For some investors, the absence of human interaction can be a drawback. They may prefer the guidance and reassurance that a human adviser can provide, especially during market turbulence.
Low fees: Compared to traditional financial advisers, robo-advisers typically charge lower fees. Technology risks: Like all technology-driven systems, robo-advisers are vulnerable to technical glitches, cybersecurity threats, and software errors, which could potentially affect your investments.

Is a robo-adviser right for me?

If you have limited capital to invest and want an easy and efficient service, a robo-adviser might be suitable for you. However, if you want personalised advice or believe in actively managing your portfolios based on market trends, it might not.

Whether a robo-adviser is right for you depends on your circumstances, how tailored you want your investments to be, and whether you are comfortable with technology leading the way when it comes to investment strategies. It’s also important to consider that your capital is at risk with a robo-adviser.

How do I choose a robo-adviser?

There are lots of options out there, and it’s important to find one that works for you. Here are some considerations to keep in mind when choosing your robo-adviser:

  • How much automation you’re comfortable with – do you want to do everything digitally, or do you want someone to talk to as and when needed?
  • What services you need – some robo-advisers offer automatic rebalancing or tax loss harvesting, which could be useful.
  • What standard features and added benefits you can find for a fee you’re willing to pay.

What are the alternatives to a robo-adviser?

Robo-advisers aren’t suitable for everyone, especially those with complex financial situations or a preference for human intuition.

Financial advisers can impart their wisdom and take the time to explain their choices to you, helping you build your own investment knowledge, which could be invaluable in the future. Advisers are also responsible for checking in with their clients regularly and re-evaluating investment goals based on changes in the market.

Another option, if you want to manage your stocks independently, is to take a course and learn how to play the stock market.

For a much lower risk option, you may prefer to put your money into a traditional savings account. If you want the peace of mind of knowing that your savings pot is growing and isn’t at risk, there are a number of competitive interest rate savings accounts to consider.

If you have a lump sum to invest, take a look at fixed rate bonds, which offer the most competitive rates of all account types, as long as you can lock your money away for a set period of time. Want more flexibility and access to your savings? A notice account or easy access savings may be a better option.

Should I invest or save?

If you’re trying to decide between investing with a robo-adviser and saving, the most important thing to consider is how much financial risk you can tolerate. This is because savings accounts are typically safer places to invest your money. While the rewards might be greater, investing comes with a lot more risk, and you stand to lose some or all of your money if your investments fail.

Even though interest rates available through some high street banks are currently relatively low, there are some types of savings accounts that offer competitive rates of interest, especially if you have a lump sum you can lock away for a few years.

Fixed rate bonds, for example, typically offer the most competitive rates of all types of savings accounts, and provide the peace of mind that the rate won’t change throughout your term, making them perfect for safe, long-term saving goals.

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