Financial technology is disrupting the way people invest, here’s how

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Financial technology is disrupting the way people invest, here’s how

Investment advisors were traditionally seen as the go-to professionals when people needed help in managing their investments or plan for their retirement.

Nowadays, financial technology – also known as fintech – has disrupted the way people invest their money by introducing artificial intelligence and algorithms into the picture to facilitate and expedite the entire process.

The introduction of ‘robo-advisors’ has effectively disrupted the financial advisory industry, as individuals can now build an investment portfolio specifically designed to meet their financial goals in a matter of minutes by making a few clicks here and there.

For business consultant and MBA graduate Jasdeep Singh, robo-advisors are an innovative way to generate wealth and plan for retirement that– among other things – promises to help Americans and individuals across the world to improve their finances.

What is a robo-advisor?

A robo-advisor is a program that uses algorithms to build and manage the portfolio of an individual or business by following a certain investment philosophy. After assessing the investor’s risk tolerance, financial goals, income, age, and other similar characteristics, the portfolio is developed to fit the profile.

The introduction of zero-commission trading services in the United States helped pave the way for robo-advisory firms because the algorithms don’t have to worry about the cost of making transactions as part of its portfolio-building or rebalancing functions.

Furthermore, broadly-diversified and inexpensive investment vehicles such as index-tracking exchange-traded funds (ETFs) have reduced the cost of holding hundreds of financial assets, while also providing the degree of diversification that a long-term portfolio requires to keep volatility in check.

There are so many attractive features found in robo-advisors that it is hard not to see their competitive edge on the traditional investment advisory industry, which entirely relied on human expertise until a few years ago.

In this regard, Dr. Singh believes that robo-advisors are here to stay will re-shape the way people invest for years to come.

Financial technology is disrupting the way people invest, here’s how

Main advantages of using a robo-advisor.

Among the key benefits of using these services, Dr. Singh highlights the following:

  • Advisory fees are lower than the industry average of 1%.
  • Robo-advisors use inexpensive and broadly diversified ETFs to expose the portfolio to different asset classes to increase the return earned by the investor over time.
  • These platforms include advanced features such as tax-loss harvesting to improve returns.
  • Robo-advisory firms can easily receive and invest small or large amounts of money on a regular basis, thus allowing people to create automatic deposits to the account and significantly improve their adherence to a savings plan.
  • Most robo-advisory firms also offer cheap banking services that facilitate the process of managing your finances through a one-stop-shop approach.
  • Users are allowed to keep track of how their portfolio is advancing toward their financial goals over time.
  • The registration process only takes a few minutes and it can be done completely online.
  • There are dozens of providers in the US market already and users can choose the one that fits their needs and expectations the best.

Which are the most popular robo-advisors in the United States?

Just to mention a few, some of the most-reputed robo-advisors in the United States are:

  • M1 Finance.
  • SoFi Invest.
  • Wealthsimple

Are robo-advisors a good fit for all investors?

The truth is that robo-advisors per se are not exactly what makes this new way of investing attractive – it is their time-tested passive investing and long-term approach which makes them a suitable choice for most investors.

Robo-advisors rely on time-tested investment strategies that have proven profitable in the long run, which allows them to adequately forecast how portfolios will perform given the market’s historical performance.

That said, a well-known mantra from the investment advisory industry is that past performance is not a guarantee of future results, which is of course something investors must keep in mind when they expose their money to the inherent volatility of the financial markets.

However, statistics have proven that, over long-term horizons, volatility levels tend to remain low while returns remain fairly predictable – at least until now.

Since most investors don’t have the time or the knowledge to manage their portfolios profitably, robo-advisors have emerged as an inexpensive way to take an active savings but the relatively hands-off approach to investing, leaving computers to do the heavy lifting.

It is important to note that although the human touch is missing in most cases, there are always teams of financial professionals who oversee and provide support to these systems. These professionals ensure that their systems keep delivering the results and the quality of services that investors expect.