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The Rise of Robo Trading

 

So-called robo-advisors focus on the science behind making investments with algorithmic trading — i.e., using computers to help automate trading. How can this benefit you? How do you find a well-qualified robo-advisor? What are the benefits of algorithmic trading?

Robo-advisors use the very same software programs that financial planning firms use. Computer algorithms select investments for you. Wells Fargo recently studied individuals under 50 years of age and found that they're more comfortable using online services to manage their portfolios (69 percent) versus those over 50 who tend to be more comfortable using in-person services (59 percent). But even this is changing. Why?

Robo investing platforms typically come with these features:

  • Little or no investment minimums.
  • Automatic rebalancing — when your funds are part of a robo investing platform and the sell price dips too low, your funds will be sold for a capital loss and automatically replaced with similar investments. It's the regularity of the rebalancing that investors appreciate.
  • Purchase of inexpensive index mutual funds and exchange-traded funds.

Robo investing is said to take the emotion out of investing. And that, say many people, allows larger returns.

Benefits of robo investing services include:

  1. Lower fees (0.25 and 1 percent) due to reduced overhead. Humans charge between 1 and 2 percent.
  2. There's no incentive to sell you certain investments or holdings.

Time magazine says robo investing and algorithmic trading are on the rise. The Wells Fargo survey found that 45 percent of investors with portfolios of $10,000 or more have heard of robo investing, but only 5 percent have taken advantage of it — $53 billion of assets under management. But that number was expected to rise to $285 billion by 2016, according to the poll. As of February 2017, AUM of just the three leading robo-advisors — Vanguard, Charles Schwab and Betterment — were more than $64 billion.

Robo investing is based on a Nobel prize-winning formula that has the ability to customize your investment strategy. The Wall Street Journal says that behavioral finance experts assisted in the development of the questionnaires that help robo-advisors figure your risk tolerances.

What don't people like about robo investing?

  • Lack of personal service — it's not used for long-term wealth management aimed at meeting particular goals. It steers clear of taxes and retirement or estate planning.
  • If you miss having access to a team of financial advisors, you can choose a robo-advisor with a financial advisory team — dedicated human professionals who work with the robo-advisor.
  • If you prefer to hear a human voice or make an appointment at a brick-and-mortar location, you will not like a robo-advisor.

When can robo-advisors be a good option?

  1. When you're accustomed to doing your own research and have no problem taking the same approach for your finances.
  2. When you are willing to keep an eye on algorithmic trading and monitor your robo-advisor.
  3. When you're a beginning investor trying to get your feet wet.
  4. When you want to increase the overall value of your portfolio and are the type to keep your investments relatively simple.

Robo investing is increasing in popularity. It offers a simple solution for do-it-yourself investors at a lower cost than traditional advisors.

Is it right for you, especially when, for example, doing a long-term estate plan? Be sure to discuss your needs and concerns with a qualified financial professional to find something you're comfortable with.

 

 
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