Efficiencies and Pitfalls of Robo-Advisors


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Robo-advisors are new investment platforms that offer digitized and long-term financial planning to clients. One of the overriding assertions of a Robo-advisor’s algorithm is that it will grant investors better returns for a lower cost than traditional financial advisors.

Robo-advisors help foster the relationship between wealth management firms and their customers. As per a recent report by Research and Markets, “Robo Advisory Global Market Report 2022“, the overall Robo advisory market is expected to reach $135.11 billion in 2026 at a CAGR of 48.08%. Here are a few advantages and disadvantages of Robo-advisors.

Also Read: Technologies that Revolutionize the Future of the FinTech Stack

Robo-advisors are Economical and Charge Less

Robo-advisors provide a low-cost alternative to traditional investing. Due to the elimination of manual intervention, organizations need a minimal investment, which significantly reduces the rates and fees.

Most Robo-advisors charge a fee based on the amount of money in the client’s account with varying platforms. At the same time, it offers tax-loss harvesting that allows clients to sell losing investments to “harvest” tax-deductible capital losses that will keep their portfolio on track. 

Establishes Digital Competitive Edge

Robo-advisors allow clients to invest in numerous assets through mobile phone applications adding value and convenience. They also give clients complete access to multiple portfolio management tools offering flexibility and security. Robo-advisors ensure a competitive advantage for the providing firms, so much so that clients also tend to switch their wealth management providers. This strengthens customer retention and assists new customer onboarding. With Robo-advisors, clients can access their investment portfolio anytime with a single touch.

Robo-advisors Provides Human Advisors Time to Focus on Clients

Traditional financial planning practices tend to white-label the Robo-advisor platforms for their clients. This takes the complex task of choosing assets out of their hands, leading to the financial advisor spending time with clients resolving individual tax, estate, and financial planning issues. The existing market of financial advisory clients is growing due to Robo-advisors. As a result, consumers choose Robo-advisors’ professional management methods instead of the do-it-yourself model.

With an array of services and benefits of Robo-advisors, here are a few reasons why a Robo-advisor might not be a good fit for the organization.

Lack of Personalization and Flexibility

Robo-advisors are programmed and configured to meet the needs of many investors. This allows them to set and edit customer goals using financial planning software. With all the supremacies in place, customers still prefer talking to a human advisor due to the need for more human connect. Robo-advisors often correlate customers’ specific situations, making the customers drop out inevitably. Personalization and complexities need mitigation from case to case.

There are sound investment strategies in the market that go above an investing algorithm. Hence, only some Robo-advisors can help if the customer wants to sell call options or buy individual stocks. Sophisticated investors prefer a broader investment portfolio rather than the restricted portfolio that a typical Robo-advisor offers.

Also Read: Top Security Concerns in The Fintech Industry to Look Out For

Tax-Loss Harvesting is not Helpful Always

Tax-loss harvesting increases the overall returns and lowers the tax bill. However, this method is significant only for customers who hold a taxable account. Additionally, the customers need to be aware of the wash sale rule. The capital loss cannot be claimed for the year if a customer purchases an ideal security within 30 days of selling a security by the Robo-advisor.

Robo-advisor is a solid option for managing investments without paying a financial advisor or if a customer fails to meet an advisor’s minimum balance requirement. It acts as a boon for investors with a limited net worth to establish professional Robo-advisory management. As technology advances in the coming years, more services will be offered by Robo-advisors providing more choices and consulting options for investors.

Apoorva Kasam
Apoorva Kasamhttps://talkfintech.com/
Apoorva Kasam is a Global News Correspondent with TalkCMO. She has done her master's in Bioinformatics and has 18 months of experience in clinical and preclinical data management. She is a content-writing enthusiast, and this is her first stint writing articles on business technology. She specializes in marketing technology, data-driven marketing. Her ideal and digestible writing style displays the current trends, efficiencies, challenges, and relevant mitigation strategies businesses can look forward to. She is looking forward to exploring more technology insights in-depth.


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