In the current world we are living in, most investors lack the knowledge, time and the necessary skills to research and manage an investment portfolio. In other cases, many investors simply lack interest or the desire to manage their investments and saving. In the past, investors usually had only two options when it comes to matters of investing their funds. They could either pay a financial advisor to help them manage their portfolio of stocks, bonds or their mutual funds. Or they could manage their portfolio all by themselves. Today there is a third option which involves hiring a “digital advisor”. In the financial service industry, new technology has been shaping the way people are managing their investments. Rather than hiring a professional human advisor to advise them on how they will go about their financial matters people are now relying on online digital advisors. A digital advisor also referred to as “Robo-advisor” is a software that has been developed to automatically build a diversified portfolio and select investments for a person. Crossbridge Connect is an example of a company that provides these softwares for individuals.
How the digital advisors work
Instead of discussing your goals and needs with a human advisor, the interaction involving digital advisors is conducted online via a website. These websites guide a person through an online questionnaire where the interested party answers some questions that will help the digital advisors to assess the individual’s financial situation, financial goals and risk tolerance. The information that you provide to the online advisors will be used by the digital advisor to develop and suggest an asset allocation for you. The advisor will also build a diversified portfolio and will manage the portfolio over time. The process of building a portfolio and suggesting asset allocation is based on a profiling algorithm that is used by the digital advisors.
Some digital advisor firms invest your money in a mix of exchange-traded funds mutual funds. Something that you need to know is that these kinds of firms will invest in passively-managed ETFs (exchange-traded funds0 or funds as opposed to funds that are actively managed. A less common option that some firms use is by investing their money in a mix of individual stocks that are in separate accounts. Immediately your online portfolio has been constructed by the digital advisor; the portfolio will now begin to be rebalanced periodically by the online advisor, this helps you to maintain your target asset allocation.
Something else that you need to know about digital advisors is the fact that different Robo advisors use different proprietary algorithms to develop portfolios for investors. Just as the regular human advisors, some online digital advisor firms can be more aggressive on their suggestions while others can be less aggressive still in their suggestions. These suggestions are dependent on the information that you provide. This means that if you indicate on the questionnaires that you have a high-risk tolerance, then the digital advisor firm will reflect on that piece of information.