The Potential Advantages of Robo-Advisers

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

Robo-advisers are overcoming many of the challenges individuals face today by providing solutions catered to a younger, tech-savvier, less financially literate, and less wealthy population. Additionally, robo-advisers are compensating for the decline in pensions offered by employers, providing accessible and cost-effective long-term advice for individuals with increased average life expectancy, and providing alternative vehicles for individuals who are now holding a higher amount of their savings and investments in the form of cash than ever before. Thus, it comes as no surprise that FINRA’s Report on Digital Investment quoted Aite Group’s  projection of global spending on digital wealth management initiatives tripling, rising from $4 billion in 2015 to $12 billion by 2019.

This success, in large part, is evidence of the potential advantages consumers have observed. Some of these potential advantages of using robo-advisers may include:

  • Lower Costs
    • Lower Advisory Fees – Fees are typically significantly lower and depend on account balances and the required account minimum, ranging from 0.00% to 0.75% (for an investment of $5,000). While these fees vary greatly across companies, it is still significantly lower than the minimum-1% charged by human financial advisers.
    • Lower minimum initial deposits – Minimum initial deposits to open an account with a robo-adviser ranges anywhere from $0 to $500 to $100,000, which are often significantly lower than using traditional human financial advisers.
    • Lower minimum investment amounts – Typically, human financial advisers require clients to have a minimum net worth or account balance (typically upwards of at least $50,000 – $100,00) whereas robo-advisers may require a significantly lower minimum balance ($500 or no minimum balance at all.
  • Customized options – Additional options that lead to efficient investment account management through fractional share, single stock diversification, direct indexing and tax management.
  • Efficient Method of Communication with clients – As individuals increasingly rely on written forms of communication (via e-mail and text messages), with many already accessing financial information from apps designed for mobile phones, communication about investments are no different.
  • Accessibility offers Ease and Convenience – Using a digital platform allows clients to conduct the transaction online, from start-to-finish, where they can simultaneously access an endless amount of information and research similar products and services – all in the convenience of their home and around their busy schedule.

Remember, while these may contribute to one individual’s successful investment portfolio, it may not fit your needs. This is why it’s important to weigh both the advantages and disadvantages of using robo-advisers.