For many investors, robo advisors are an invaluable tool. These increasingly popular programs offer computer-optimized investing for relatively small fees. But can robo advisors really net you a profit?
Robo advisors can help you make money. Though how successful you are will depend on various factors, and getting rich isn’t guaranteed. Robo advisors are typically considered a passive form of investing, but they can provide stable and impressive returns.
This article explores how robo advisors can make you money, as well as their benefits vs. their downsides. Getting rich is never a guarantee. Still, these rapidly growing platforms are a potentially powerful and profitable tool.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How Robo Advisors Can Make You Money?
Robo advisors are virtual services that provide automatic investing mainly through computer algorithms. These platforms first assess your investing goals and capabilities. Then, they can automatically buy and sell assets for you.
Robo advisors possess numerous qualities that make them an efficient investing tool. Especially when compared to other advisors or funds.
For one, robo advisors typically collect minimal fees. Since their investing is primarily software-driven, they don’t need to fund overhead for individual investment planners.
Even better, some robo advisors (like Betterment) require no minimum balance and are free to join.
This is in contrast to services managed by humans, which commonly have higher monetary barriers to entry.
These digital services can also handle complex processes like tax-loss harvesting and portfolio rebalancing. Meaning over time, they may deliver remarkable savings and long-term investment growth.
And if you believe popularity is any indicator of success, know that robo advisors are on a meteoric rise. From 2019 to 2020 alone, the robo advising industry grew by a whopping 30%.
Can Robo Advisors Make You Rich?
All that sounds promising, but you might wonder just how lucrative these services are. Are they something you could use to accumulate wealth reliably? Does it take long for them to work?
Robo advisors can help make you rich, but they generally grow your investments slowly over time. Because their algorithms are known for investing conservatively, robo advisors are considered passive and relatively “safe” investments.
It’s rare for robo advisors to provide aggressive or exponential growth in the short term.
This perception may change in the coming years, though. As robo advisors continue evolving, they may utilize increasingly complex and risky strategies.
Also, keep in mind: No investment method guarantees wealth and riches.
If there was one that did, we’d all use it.
However, robo advisors are excellent for those new to investing and wanting to grow their savings. Or for those who don’t have time to manage all their assets optimally.
Robo advisors provide numerous such benefits, but they do have their downsides.
To understand these pros and cons, it’s best first to understand how robo advisors work.
How Robo Advisors Work?
First and foremost, the name “robo advisor” is a little misleading.
There isn’t a digital person or machine actually talking to you or explaining recommendations.
At least not yet.
Instead, robo advisors use both their algorithms and your investing goals to provide optimal returns on your invested capital. Their software accomplishes this by balancing profit potential, historical performance, risk, and other factors.
Most services will have you fill out a survey when you sign up with them. This tells the robo advisor what you’re trying to accomplish and what your risk tolerance is.
That way, the software can allocate your assets under management (or AUM) in a way you more or less prefer.
After you set up a recurring deposit, your robo advisor handles most of the investment leg work.
You might wonder how exactly these programs prioritize acquiring and selling securities. Or, more broadly, what is their trading strategy?
Most programs utilize variants of modern portfolio theory.
Next, let’s look at how robo advisors utilize this strategy. And how that can make you money.
Modern Portfolio Theory
Modern portfolio theory was outlined in 1952 by Nobel Prize winner Harry Markowitz. Despite the global economic landscape changing drastically since then, the key concepts of Markowitz’s theory are still widely observed today.
Chief among those ideas is diversification.
Modern portfolio theory suggests a mix of different investment types covering varying levels of risk. That way, investors can maximize profit without being over-exposed to potential losses.
Robo advisor algorithms typically adopt a modified version of this strategy. And based on the user’s preferences, many services accommodate higher or lower risk investing styles.
Keep in mind this explanation is an over-simplification, as the theory is quite complex (but worth looking into).
How Successful Robo Advisors Are?
Now, you might wonder if robo advisors live up to the hype. Can these programs really be that successful?
The answer is a resounding yes!
Research has observed robo advisors outperforming market indices and other actively managed funds. And by wide margins in some of those cases.
Furthermore, they’re seeing wider adoption and acceptance in recent years from investors at all levels. A major factor fueling this growth recently is the economic uncertainty brought by the COVID-19 pandemic.
Digital advising and automated portfolio allocation software are tools wealth managers began using in the early 2000s. However, they only became widely accessible to retail investors in the last decade or so.
But despite being relatively new, robo advisors are no doubt here to stay.
In fact, projections suggest the industry should account for around $16 trillion in AUM by 2025.
Pros of Robo Advisors
As mentioned above, robo advisors have numerous benefits over their conventional counterparts.
Here are some factors that make them a promising option for making money.
- Robo Advisors are perfect for portfolio rebalancing. Rebalancing a portfolio can be arduous, and transaction fees may quickly add up. Thankfully, robo advisors do it automatically and for essentially no additional cost.
- They are cheaper than conventional advisors. Most robo advisors have annual fees around 0.20%-0.50% of your AUM. Conversely, human advisors and actively managed funds usually charge fees closer to 1%-2%.
- Robo advisors are accessible and easy to join. For this reason, some economists consider them a vital part of broader financial inclusion.
- They follow the math and optimize your chances of success. The algorithms that drive robo advisors have no opinions or feelings to cloud their judgment.
For plenty of investors, robo advisors serve as a crucial and stable boon to their portfolios.
Cons of Robo Advisors
Practical as they can be, robo advisors have notable weaknesses.
Above, we covered what makes them a solid investing planner. But no one, not even robots, can consistently predict the stock market. Using these services is not guaranteed to get you rich.
Now, let’s look at some of their specific shortcomings.
- Robo advisors currently lack flexibility in their investing. This aspect may improve over time. But currently, most platforms are limited to relatively simple investment plans.
- Despite the name, robo advisors don’t truly offer financial advice or discussion. As a result, their plans are typically less personalized. Though, some platforms recently began offering hybrid services.
- Robo advisors are still new and need further evaluation. While early results are promising, these programs have only existed in the mainstream for about a decade. Time will tell if they continue to be fruitful.
- They aren’t as useful for people who actively invest. Robo advisors handle the hassle of researching and trading securities for you. If you prefer engaging with the market directly, you won’t get as much value from robo advisors.
Before using a robo advisor, it’s vital to consider the above potential downsides. Promising as this technology is, it still has room to improve.
Also, keep in mind that as robo advisors continue to evolve, their pros and cons may change as well.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
The advance of robotics and AI is only accelerating. And with that comes a more automated financial sector.
Robo advisors continue to rise with the technological tide, becoming increasingly popular tools for investors. And they’re only getting more optimized and efficient as time goes on.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
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