INVESTMENT: Robo-advisor better for younger investors

I believe, as most of you would agree, that each one of us needs an advisor to help us take the right financial decisions. Now with technological advancements, the shape, size and form of a financial advisor has undergone a change and what we call the robo-advisor is gaining lot of momentum.

This will make you think whether to use your old known trusted financial advisor or go for a robo-advisor? But to answer this question you need to first assess your situation and financial goals, because each has its own pros and cons and it works both positively and negatively under different circumstances. It is also driven by an individual’s behaviour plus investment pattern.

The job of a robo-advisor is to use algos in doing your investment planning and to come out with the best asset allocation suiting an individual’s risk profile. It works on the foundation which is passive in nature but the same will change with constant machine learning. Whereas your financial advisor’s job is to look at your investments in depth and arrive at timely calls for generating greater returns and always aim to outperform.

The main factor we need to consider in this entire debate is the level of wisdom as against the algos. The robo-advisor will work on algorithms and does complicated calculations to dish out various analytical solutions and patterns, but it only works on the basis of the inputs that are fed into the system. What this input needs to be requires wisdom, and that can come from experience. This is not to say that robo-advisor will not learn or evolve. In fact, that is called machine learning and with time these algos will learn and become more robust.

What the robo-advisor lacks is tackling emotions that drive an investor. This is one of the critical roles for an advisor, because investing has to do more with behavior than science. For instance, what would a person do if they win a lottery or get a salary bonus? More often than not many of us would go on splurging this sudden cash than making additional investments.

Robo-advisory will work well when your financial goals and the priorities are clearly laid out as against the customised planning when you should seek the help of a financial advisor.

Ideally, robo-advisors will suit young investors because they are new to the investing world. The lower cost of this model too will suite them better. They will also be more at ease using this model. So, while starting your journey towards investing, robo-advisor will work best and the moment your investment needs more customised handling, a financial advisor will work better. An advisor who brings the required expertise and experience in helping you achieve your desired goals. The best part is you can make them accountable for their work and secure your financial future.

With time, robo-advisors will also establish the required credibility and will also carry the inherent knowledge as required to give you customised advice. But until then just be aware about the pros and cons of both the options. After all, it’s your hard earned money, so stay smart, stay careful when it comes to deciding which one to choose.