Robo Advisor

Robo Advisor — is a program that offers services concerning financial consulting. Such programs are used in various spheres: trading, tax-loss harvesting, accounting, etc. Robo advisor gives automated answers based on the predefined algorithm. Also, it can automatically select the assets for investment.

Functions of Robo Advisor 

Robo advisor is a program that offers strategies for investing based on calculations. These services are created by professional programmers that consult with traders and financial specialists. They suit traditional investments but aren’t the best thing for complex assets. Here are the well-known robo advisors: Vanguard Personal Advisor Services, TD Ameritrade Essential Portfolios, Fidelity Go, Schwab Intelligent Portfolios, and E-Trade Adaptive Portfolio.  

Robo advisors usually aren’t expensive, but sometimes they require payment for the subscription. These programs work as online services or mobile applications. The investor should open a personal account or download the app on the smartphone. Then, they indicate the assets they want to invest in. These services also provide the additional service of socially responsible investment, financial consulting and investment calculator. 

Robo advisors offer various assets for trading. In most cases, they apply modern portfolio theory. This theory aims to achieve the best ratio of risk and return. Modern portfolio theory says that the risk in the case of each instrument can be divided into risk and unsystematic risk. Systematic risk means all market risks, which cannot be fully diversified (interest rate fluctuations, recession). Unsystematic risk is a risk specific to each instrument that can be diversified as the number of instruments increases. Unsystematic risk isn’t correlated with general market trends.

A good robo advisor should provide the opportunity to contact the support service in case of any issue. This contact passes via email or chatbot. Often, the owners of sites or apps provide instruction for clients to simplify their work. 

How to start a work with robo advisor:

1. Open an account. The new user should register an account and answer several questions concerning their age, level of risk they accept, and investment goals. 
2. Connect the personal account to the bank account. Before doing this, it is necessary to ensure that the robo advisor is safe.
3. Launch the robo advisor. The robo advisor will select the most profitable assets and investments for the user. A good program should always get permission before making a certain action.
4. Customize the robo advisor. The developers offer various ways to customize the advisor according to the user's needs. For example, they may set a ban for investing in specific assets or set the notification for certain market events.  

Pros and Cons of Robo Advisors

Robo advisors can be very helpful that the user should understand: they are just machines that follow the algorithm, and they aren't omniscient. The user should take all decisions carefully without implicitly trusting the machine because the usage of robo advisors has both advantages and disadvantages.

Advantages of robo advisors:

• Easy to access. Many robo advisors are free or have moderate prices. A robot is much cheaper than consulting a financial expert. This affordability is one of the major factors of robo advisors’ popularity.
• No human factor. Humans can be unpredictable and act imprudent. The machine, in contrast, always follows the algorithm and isn't affected by negative emotions, fatigue, or bias. 
• Large spectrum of services. Robo advisors offer various additional services like retirement planning, rebalancing of portfolios, or insurance services. Many services have a blog page with financial advice on their sites.

Disadvantages of robo advisors:

• Sticking to the algorithm. Robo advisors follow the mathematically calculated algorithm, but the real situation may require them to act another way. Sometimes it is necessary to venture outside the box. 
• Quality of algorithm. The algorithm itself may cause questions. The user doesn’t know the qualification of the programmers and can’t check the quality of their work. Some algorithms are too simple or too complicated.
• Problems with technical support. Not all services offer stable contact with technical support. Users have to wait for too long, and some issues stay unresolved. So users are left on their own, and they lose money.

The key to this dilemma is the combination of a mathematical algorithm and human creativity. The investor should check the quality of the advisor on several simple assets. If the robot passes the test, this means it is safe to use it. Also, it is necessary to configure the advisor for asking the permission of the user for important actions. It will help to decide in difficult situations when it is necessary to think outside the box.

Check if the service offers a demo account. A demo account is the possibility to check the work of a demo advisor safely. However, the functionality of demo accounts may be limited. That’s why the user should check the comments concerning certain services and watch their place in the ratings.