What are Robo Advisors: Definition and How They Work

If you are wondering what robo advisors are or you are not sure what they are, you are not the only one. This is a recent and rapidly growing phenomenon that is beginning to be talked about but about which little is known yet.

 When you imagine what robo advisors are , your thoughts turn to robots, at least for the traditional idea we have of them: humanoids made of metal and electrical circuits capable of replacing men, in whole or at least in part. But it is not so.

What are robo advisors

Simplifying as much as possible, robo advisors are software that – thanks to their algorithms – offer an automated service for managing the investment portfolio. The objective is to create an asset allocation consistent with the investor’s profile, which has the possibility to establish the time horizon and the level of risk. Why rely on software? Well, because man is not a perfect investor. Each of us can be influenced by several factors, such as memories of wrong operations, the enthusiasm we feel in the surrounding environment, or simply the fear of making mistakes. A computer system, on the other hand, “limits itself” to making calculations and is certainly better than us at reducing risks.

Robo advisor free (or almost)

In addition to this, however, it must be considered that the robot advisors also allow you to save. The costs of commissions, which are borne by the investor, for example, disappear entirely. There are still very few investment companies that rely entirely on an algorithm for portfolio movements. Robo advisors are typically used to support consultants and managers in their assessments. So the man always remains in command, who only gets help from a machine to reduce the margin of error. So we can say with certainty, at least for the moment: although few still know what robo advisors are , there is no need to be scared because they will not steal the work of those involved in investment management.

Robo advisor, opinions

But no one can therefore see where the robo advisors can go. Already today they announce themselves as a real revolution for the world of investments. If we wanted to pinpoint a birth date of what is becoming a phenomenon we had to go to 2015, when BlackRock (the world’s largest manager) bought FutureAdvisor an automated consulting company. From there began a race in which practically all the other big names in finance participate today, from Invesco to Goldman Sachs, hunting for small companies and specialized startups. According to PWC, Robo advisors in the world today invest a total of around  $ 300 billion: a budget destined to grow tenfold over the next ten years. The role of young people will be fundamental. Millennials and Generation Z, in fact, although not familiar with the world of finance, are perfectly familiar with the web and digital technologies. They are the investors of the future, and maybe they will understand better than their parents what robot advisors are and how to use them.

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