Robo Advisors - Robo what?

 
Photo by  rawpixel  on  Unsplash

Photo by rawpixel on Unsplash

Robo Advisor - Robo what?

A very popular topic currently are Robo Advisor. Since quite a few of our community members don’t fully grasp the concept, we’d like to shed light on it.


What is a Robo Advisor?

Robo Advisor are not small robots that sit in front of the computer or phone and provide investment advice to you.

However, this image is not 100% far from the truth. Unlike bankers or asset managers who actively support you with selecting your investments or just select them for you, the Robo Advisor is based on an algorithm.

This algorithm in turn is based on our risk profile, which you define prior to investing your money with a Robo Advisor.  Other factors which are inputted are parameters e.g. preferred asset classes or regions. The products that make up your portfolio are ETFs (Exchange Traded Funds, e.g. funds traded on a stock exchange, bond funds, commodities funds or real estate funds). There are two variations of a Robo Advisor: an active model and a passive model. In a passive model, the portfolio remains stable for a time period and the investments are only rebalanced. With an active model, the algorithm checks your portfolio every day. The algorithm checks e.g. market fluctuations or even changes within the product universe. If a product is offered at a cheaper price, then the algorithm changes to the cheaper product. If a certain product deteriorates, the algorithm also changes the product again. Because all of this happens automatically and is not being implemented by "humans", it is called Robo Advisor. Since most  portfolios of a Robo Advisor's are based on ETFs, a Robo Advisor is suitable for long-term investments and not designed for quick money.

What are the advantages of a Robo Advisor?

  1. Robo Advisor invest in ETFs that are cost-effective, making the fees of a Robo Advisor cheaper compared to a classical investment adviser or bank adviser

  2. Since the Robo Advisor is based on an algorithm, there are clear rules on when a product is exchanged, thus preventing certain human psychological errors is ensured

  3. The Robo Advisor is particularly suitable for those who do not want to choose their own ETFs, as the Robo Advisor builds a portfolio based primarily on the risk profile

What are the disadvantages?

  1. Compared to the conventional passive investing approach with ETFs which you do yourself, the fees are higher. If you buy ETFs at your online bank such as comdirect you pay ca. 0.2-0.5%, whereas using the services of a Robo Advisor amount to between 0.5-1% p.a. (in addition to the ETFs). Typically the fees are linked to the investment amount (a higher investment amount leads to lower fees).

  2. Some Robo Advisors require a minimum investment of 10,000 €, which is not feasible for everyone. On a positive note, there are a lot of Robo Advisor which require a much lower minimum amount (for example growney).

  3. Since it is an algorithm, there is no human advisory in the literal sense. If you need advice, you will not receive this when opting for a Robo Advisor.


Where can I find a Robo Advisor?

Robo Advisor are digital financial advisers that work with an algorithm. The providers are online and thus there is no branch which you could visit. The biggest Robo Advisor are:

  1. Scalable Capital: here you need at least 10.000 € investment volume and the fees are around 75% plus the ETF costs. From 50 € per month you can also set up a savings plan

  2. Growney: Here you can invest from just 1 €, the costs are around 0.39-0.99% depending on the investment volume plus ETF costs. From a savings plan of 1 € per month you can start here

  3. Visual Vest: minimum amount is also € 500 and / or € 25 per month with a fee of 0.60% plus fund costs. Visualvest also offers sustainable portfolios

  4. True Wealth for the Swiss among us: the entry fee here is 8,500 CHF with a fee of 0.5% plus product cost.

There are many more providers like vaamo, quirion, cominvest (from comdirect), fintego etc., here you can find a comparison, if you are interested in more: https://www.extra-funds.de/robo- advisor /


In a nutshell:

If you do not like the hassle of looking for investments (such as ETFs) or if you are overwhelmed by these choices, then a Robo Advisor can be a great way to participate in the stock market with relatively small amounts. If you feel comfortable choosing ETFs or other products, then you pay a little more for a Robo Advisor because, in addition to the product costs, the fees for the Robo Advisor occur. At the same time these are more affordable than financial advisors. In summary, we believe Robo Advisors are a good and more affordable alternative to owning a portfolio with an investment advisor, financial advisor or bank.


Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson). 

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