Simply put, a robo-adviser is a company (or service) that offers investment management with a minimum of human input. These are digital platforms that will use complex algorithms to create investment portfolios for Simran based on the information she will provide when she signs up for an account. As everything is automated, runs digitally, and relies less on the decision-making skills of individual professionals, robo-advisers can be excellent solutions for people who are just getting started, looking to build up their assets, and want to automate as much of the process as possible. They typically offer several pre-constructed portfolios that Simran could choose from, or may also allow her to build her own from a universe of ETFs and other mutual funds.
Having said that, an algorithm can make recommendations for Simran based only on the information she will provide. That information may be limited to basics that can be quantified: age, proposed retirement age, and where she falls on a spectrum of conservative to aggressive in terms of risk-taking. These factors are important and must be considered when constructing an investment portfolio. But the real world is not blackand-white. It’s way more nuanced than straightforward. Her financial goals are just as critical to making the ‘right’ investment decisions as how old she is and how she feels about risk. An algorithm can’t evaluate that, nor can it provide her advice on what to do with difficult, emotional, or subjective scenarios that will typically crop up in real life. Roboadvisers offer no advice. They might have blogs on their websites, but they deliberately steer clear of giving specific recommendations to clients.
An app can provide a great way for a young earner like Simran to get started with investments, and may remain a good choice for her over time — but she might also come to a point where she will need more than just an algorithm to figure out the optimal way to get the most value from her money and her wealth.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
