Robo advisor – What is it, definition and concept | 2022

A robo advisor is an automated capital manager that is capable of creating an investment portfolio based on the investor’s preferences and risk profile.

In other words, a robo advisor is an automated manager that facilitates the investment process for those people who do not have enough knowledge to do so.

There are many people who have money saved and decide to invest it with the aim of obtaining a return. However, most of them do not have the necessary knowledge to be able to invest in the stock markets with guarantees of success.

For this reason, capital managers or advisers have traditionally been used to help the investor invest the available money. With the passage of time and the advancement of technology, a new investment option has emerged in the United States, known as robo advisors.

This word comes from two English words, robot and advisor. In this sense, what it means is that an automated advisor manages the user’s investment process.

But, this is not entirely automated. The robo advisor does not mean that an algorithm is the one who manages your money. There are teams of financial market analysts who are responsible for preparing certain investment portfolios, based on the risk profile and investor preferences.

Therefore, when someone decides to invest through a robo advisor, they will be asked a few questions beforehand (suitability test) to determine their investor profile. Once this is done, the investor is offered what the robo advisor considers to be his optimal portfolio. This is possible thanks to the previous work of the analysts and the algorithm that crosses the data.

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Advantages of the robo-advisor

Next, we explain the main advantages of the robo advisor:

  • It is not necessary to have great knowledge of the financial markets to use it.
  • Their commissions are lower than those of traditional advisors or managers.
  • Investing in a robo advisor is a relatively simple process.
  • They are usually diversified and balanced portfolios, since they are really designed by an analyst.
  • The investment procedures are fast because they are carried out through a computerized system.
  • The investor does not have to be on top of their investments making purchase and sale procedures.
  • They have a support to help the investor with a personal treatment between advisor and investor.
  • The minimum investment you make is generally low.

Disadvantages

Finally, these are some of the advantages of a robo advisor:

  • It can convey distrust as it is a completely online investment process.
  • These are preconfigured portfolios, so if the investor wants to make other investments, he cannot go outside the established.
  • Being a completely online procedure, it may be the case that there are scams. For this reason, we recommend that you find out about the type of robo advisor it is and the company with which it is associated.
  • The suitability test may not be truly representative of the investor’s profile, offering an inappropriate portfolio.
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