Investment: A Robo Advisor can do this better than a human!

Investment: A Robo Advisor can do this better than a human!


Robo advisors are designed to make it easy to enter the stock market and offer a time-saving, low-cost and long-term investment strategy. We explain for whom this passive form of investment is suitable and what the digital asset manager can do better than a human one.

Many savers notice that their money is increasingly losing purchasing power. And they are increasingly realising that they cannot expect a high return without a certain amount of risk. Even long-time sceptics realise that investments in shares are without alternative; at least for a part of the assets. Robo advisors appeal to investors who lack the necessary knowledge about shares, Investment-Funds and ETFs and who are looking for an easy way to get started on the stock market.

How a Robo Advisor works

Robo advisors are sophisticated programmes that take care of selecting and managing your investments. At the beginning, the advisor asks you very precisely about your personal ideas; for example, about your risk tolerance, investment horizon or personal asset circumstances. On this basis, he puts together a suitable portfolio for each individual client.

The investment strategies of Robo Advisors are based on algorithms and scientific findings. They track the stock market at all times and calculate which adjustments to the portfolio are necessary at what time in order to achieve the highest possible return in the long term - based on the client's specifications. The higher the risk or the proportion of shares in the portfolio, the higher the expected return in the long term. It therefore depends to a large extent on your personal risk tolerance and investment horizon which of the three typical investment strategies you pursue:

- defensive: A large part of your investment amount flows into ETFs or bond and real estate funds

- balanced: The Robo Advisor divides your capital evenly between safe investment products and securities with higher return opportunities

- offensive: The share of equities in your portfolio predominates.

As with all investments in listed securities, price losses can occur with a robo invest. With the equity portion, you secure higher return opportunities, but at the same time there is the risk of price fluctuations and also of losses.

Robo Advisors invest mainly in ETFs

Each robo advisor pursues its own strategy. What all robo-advisors have in common, however, is the approach of assessing the investor's risk propensity by means of an online questionnaire and then usually recommending either a low, balanced or high share portfolio. The robo advisors also differ in when and how often they rebalance their portfolios. Some only adjust the share quota once a year, others make it dependent on whether shares fall or rise sharply.

The fact that most robo advisors build their portfolios from passively managed ETFs makes sense: they bundle many shares of different companies and economic sectors so that the money can be invested more broadly and with far less risk than with individual shares.

Wealth managers, whether human or algorithmic, select investments for you and manage your portfolio. But there are crucial differences between human and digital asset managers - often to the disadvantage of financial advisors. We list the three key advantages of a robo advisor - and one disadvantage.

These are the advantages of a robo advisor

1.) Low fees and minimum investment

Most fully automated robo advisors charge a fee of between 0 and 1 per cent of your portfolio value each year. Some are even free. Most financial advisors collect between 1 and 2 percent of your portfolio value for their services. If, for example, a financial advisor manages a 500,000 euro portfolio and charges a two percent fee, this item amounts to a hefty 10,000 euros per year. In addition, there is sometimes a success fee.

Such costs do not apply with a digital asset manager. Also, compared to financial advisors, most robo advisors do not require a minimum investment amount to consider you as a client.

2.) Human fallibility is virtually eliminated

Robo advisors have a key psychological advantage: they tune out emotions when making investment decisions, whereas human investment advisors are subject to their own stock market psychology. A financial advisor will often try to "beat the market" with targeted stock picking and selection, but this very rarely succeeds, as a comparison among fund managers shows. According to a study by MarketWatch, only 23 percent of actively managed equity funds outperform their passively managed peers. And even if they manage to do so, it is usually not for several years in a row. According to research, after just five years there is no fund manager who has outperformed the market in every year.

3.) Time saving

Once you have been asked about your personal risk profile and investment horizon and your portfolio has been verified, you as a client usually do not need to take any further action. You can sit back, relax and watch your money grow. The Robo Advisor takes care of the selection process of suitable funds and ETFs for you.

Disadvantage: Advice based on your own life situation is missing

A robo advisor usually also allows you to change your investment strategy. However, not every provider regularly asks clients whether their circumstances or financial situation have changed. If, for example, a salary increase beckons, the family has a new baby or the purchase of a home is planned, you should also rethink the investment concept. Here, financial advisors are much closer to people and their respective life situations and can provide more individual and targeted advice.