By the end of 2017, the U.S. banking system had $17.4 trillion in assets and a net income of $164.8 billion.
As technology advances, banks are looking for innovative ways to keep up and stay relevant. Over the years, banks have been changing their product offerings. They are releasing new products that enable them to offer a better value proposition to customers.
Today’s innovations involve the use of technology to offer financial advice to its users.
What is a Robo-advisor?
A robo-advisor is a fully automated portfolio management service. Customers who use robo-advisors can access them online anytime. Several major banks like Chase and Wells Fargo offer these services to customers.
Companies use computer-generated algorithms to choose low-risk investments for customers. These algorithms also factor in time and risk tolerance. These robo-advisors are also a fraction of the cost of a human finance advisor.
What Are the Advantages of Robo-advisors?
Using robo-advisors can ultimately translate into more money for the average investor. This is due to the lower cost and other features like tax-loss harvesting and automated investment portfolio rebalancing.
Using a robo-advisor is a good choice if you would rather maintain a hands-off approach with investing. You also might not have the financial know-how required to build and maintain a successful portfolio. Or, you might not be able to afford a financial adviser. Robo-advisers tend to be cheaper, which allows you to invest more.
How Do They Work?
Once you open an account, you’ll fill out a questionnaire so the system can understand your risk tolerance and investment goals. Your asset allocation recommendation will then be calculated and presented to you. The robo-advisor builds you a portfolio of low-cost exchange-traded funds (ETFs). Robo-advisors don’t usually trade stocks.
After your account has been customized, the system automatically monitors and rebalances your portfolio. Some systems also give you access to a human professional if you need a review of a portfolio from time to time or if you simply need advice.
Multiple platforms are showing off their own robo-advisors. It’s important to do all the necessary research before making the decision to commit to one.
Benefits of Robo-Advisors
Choosing to put your investment in the hands of a robo-advisor offers a host of benefits:
It’s cheaper: this is one of the greatest advantages a robo-advisor has over a human financial advisor. A financial advisor usually charges a flat fee between $1,500-$2,000. Not only that, but they also usually charge 1%-2% of your assets as long as they’re managing your portfolio. Robo-advisors on the other hand only charge about .25%-.89% of the assets.
Convenience: Robo-advisors give you the opportunity to create an account and access it quickly online at any time. You won’t have to wait for an appointment with your finance expert.
Simplicity: by simply answering a few questions, robo-advisors can able to generate a robust investment portfolio that works for you. And if you want to change the direction your portfolio is headed, you can change your risk tolerance which alerts your robo-advisor to change your portfolio.
With all these benefits, it’s no surprise that several banks around the country are now offering these low-risk services to their customers. And although there are still some fears about robo-advisors, one thing is evident: This technology has the potential to revolutionize the finance industry completely and help consumers reach their financial goals.