What is a robo advisor?

This article is part of the investing basics series from InvestingHero.ch

Simply put — A robo advisor is a software application that will construct and manage your investment portfolio.

They are ideal for someone new to investing, or even experienced investors who no longer wish to be ‘hands on’ with the active management of their portfolio.

No doubt about it, robo advisors have played a key role in lowering the barrier of entry to buying stocks and entering the world of investing without the need of a financial advisor.

Like the US and the UK, Switzerland has seen significant traction and innovation in recent years in this area of fintech. Most, if not all, of the platform reviews at InvestingHero have robo advisors involved, and for good reason — which we’ll talk about in this article.

How do robo advisors work?

A robo advisor as we’ve covered is software, software containing a series of algorithms to react and adapt to changing market situations based on your investment approach.

They can run automatically, and will buy and sell assets, such as index funds, bonds and other asset classes based on your pre-defined risk model.

This risk model analysis will depend on the investment platform or broker you are using, and you’ll often go through a survey to understand your risk and preferred investment profile.

You’ll be asked questions such as your age, how much you earn, how long you want to invest for and how dependant you are on your invested capital to build out your risk profile.

For example, if you are 30 years old with a 35 year investing horizon, the robo advisor might allocate your portfolio to 75% stocks, 15% bonds, 5% real estate and 5% cash.

Regardless of specifying a low or high risk portfolio, the robo advisor will ‘rebalance’ your portfolio to maintain that balance of stocks and bonds as prices change in the market in order to maintain your risk profile criteria.

This is something traditionally a financial advisor would also do, whilst taking additional commissions for the trades which get hidden away in the TCI (total cost of investing) figures.

» Related reading: ‘8 Common investing mistakes to avoid’ (no. 8)

Which isn’t the case for most robo advisors — transaction fees and commissions are normally zero, as we’ll discuss next.

How much do robo advisors cost?

The robo advisor model will typically take a percentage of the assets under management in the portfolio.

Continue reading this article at InvestingHero.ch