Robo-advisors are automated asset managers: controlled by algorithms, they can create and monitor portfolios. Can robo-advisors replace real investment advisors? Who are the digital helpers suitable for?
Inflation or not, German citizens put a lot of money aside compared to citizens of other industrialized countries. According to the Federal Statistical Office, this was an average of around eleven percent of income last year. Some ask their bank for advice on the best way to invest their money, others do their own research. Still others use a so-called robo-advisor on the Internet. That means something like “advice robot”.
It seems like a modern twist on traditional investing. A robo-advisor is a kind of digital financial assistant – it helps you invest money for the long term and creates a portfolio. The investment suggestion is just a few mouse clicks away.
Comfortable but expensive
In a questionnaire, for example, the “Robo” asks about the financial goal and how much risk the investor is willing to take – low, average, above average or very high? How is my self-assessment? If I am willing to take risks, the robo-advisor invests the money primarily in stock funds. Less risk means more bonds in the portfolio.
“This is certainly a relief for those beginners who don’t have the confidence to open a completely self-managed account at a bank and then select a suitable fund,” says Hendrik Buhrs from the money guide “Finanztip”. In addition, robo-advisors could lead to certain target groups becoming even more confident about the topic of investing and the stock market.
On the other hand, the investor pays for the convenience and service. Compared to a direct bank account, the ongoing costs of a robo-advisor are higher. This amounts to around half to over one percent of the investment amount per year. For a depot you set up yourself at a cheap bank, the costs are only 0.2 to 0.3 percent.
The limits of robo-advisors
There are differences in how the money can be distributed: Some robo-advisors change the portfolio depending on how the stock market is doing. Losses should therefore remain below a certain value if possible. To do this, they rely on the opinions of analysts. Other robo-advisors largely maintain the original allocation and rebalance at most once a year.
The digital investment advisor can therefore take on many of the tasks of a human investment advisor or fund manager, such as creating and monitoring portfolios. However, the digital helpers cannot provide comprehensive financial advice. “The advantage of a financial advisor is that he looks at all the assets and puts together the portfolio accordingly,” says Birgit Wetjen, financial journalist and financial coach. Real estate or insurance claims are not included in the information the robo-advisor receives.
Why time is a crucial factor
Investing takes time to benefit from long-term developments. The costs are important. Neither a robo-advisor nor an asset manager guarantees optimal performance. Incorrect information or expectations can also mean that the original investment strategy has to be adjusted because personal or financial circumstances can change over time.