There is always a heated debate among many investors and experts about traditional brokerage businesses and robo-advisors in terms of which one is superior, which one offers better investment protection as well as higher returns.
The investors are also keen to know the future sustainability of both models. So, Let’s get an idea about:
What is a Robo-Advisor?
A robo-advisor is basically a fully automated investment platform/company that handles the investment management duties on behalf of the investors.
Robo-advisors mainly use computer algorithms to handle the client’s investment portfolio with minimal human intervention. Initially, robo-advisors use an online questionnaire to get an idea about investors risk appetite, time horizon, and investment goals.
This information is then used to drive investor portfolio, e.g. risk-averse, risk-taking, and balanced etc.
What is a Traditional Brokerage Business?
Traditional brokerage businesses allow the investors to open a brokerage account and helps them make or purchase investments with the help of money they have deposited into their brokerage account.
Unlike, the emerging robo-advisors, traditional brokerage firms charge high brokerage fees for managing your investments, if you opt for managed or full-service brokerage account.
What are the Major Differences between Robo-advisors and Online Brokerage businesses?
Investment Decision Making: The first major difference that you should know about brokerage business and robo-advisor include investment decision making process.
In the case of robo-advisors, they act as investment managers and manages your entire portfolio based on your risk profile, investing goals, and market conditions.
On the other hand, brokerage business advocates investor autonomy where investors can choose which assets (e.g., stocks, bonds, etc.) they want to invest in.
Minimum Investment Requirements: As per the data, close to 70% of the online brokerages do not have any minimum amount requirements. On the other hand, many robo-advisors do put a minimum investment requirement that goes up to $10,000. Fee Structure:
Robo-advisors charges a very low fee (e.g. 0.15% to 0.50% of the investment) in comparison to the traditional investment managers, whose fees generally vary between 1 to 2% of your investment funds annually.
Which One Should You Choose?
You, as an investor, can opt for robo-advisory services when:
- You don’t need to establish direct contact with your fund manager
- You don’t meet the requirements of a traditional human advisor
- You do not have much time for managing your investment portfolio
- You are ready to allow someone else to do all your investing
As an investor, one should select a full-service brokerage business or human advisor when:
- You don’t agree with the personal risk profiling or investment allocation made by robo-advisors
- You believe human contact is essential in the investment process
- You want some degree of control over your investments with regular suggestions
- You are not comfortable with making online investments by yourself
Which Model Will Win in Future?
Well, it’s hard to predict which model will provide more profits to investors in the long run as both have some downsides. But, what can be easily said is robo-advisors are a great tool to automatically buy & sell assets, rebalance your portfolio, and works very well in many scenarios.
Robo-advisors also charge very low fee, but again since every investor’s temperament and the situation is different, the risk profiling and asset allocation done by a robo-advisor might not suit for him. In such a scenario, you can take the services of a traditional investment advisor based on your investing style.
Many Fintech firms are actively engaged in developing investment solutions that offer both human and robo-advisory support to investors for creating a fully optimized portfolio.
DCI is one such unique cross-asset investment ecosystem that allows the investors to create, manage, and optimize their investment portfolio (hybrid ‘real and digital assets’) by taking help of a traditional human advisor or robo-advisor, based on their choice.
Originally published on: DCI Ecosystem Blog