Investors have traditionally had two options when it comes to managing their investments: doing it themselves or working with a human financial advisor. However, the emergence of robo-advisors has introduced a third option that combines the benefits of professional money management and advice with the convenience of an all-digital platform.
Robo-advisors are online investment services that provide financial advice based on algorithms. Since their introduction over a decade ago, the robo-advisory industry has grown significantly, managing $460 billion (Dh1.7 trillion) in 2020, a 30% increase from the previous year. Analysts predict that this trend will continue, and robo-advisory services will become a $1.2 trillion (Dh4.41 trillion) industry by 2024.
The advantage of using a robo-advisor is that they typically charge lower fees than human financial advisors, around 0.25% per year compared to the traditional 1% or more charged by financial advisors. This is because robo-advisors use algorithms to automate trades and invest in low-cost ETFs.
When comparing the costs associated with using robo-advisors versus human financial advisors, a median fee of 0.25% of the total investments is assumed for robo-advisors, while an estimated fee of 2% of the total managed asset value is used for human financial advisors. It is important to note that fees may vary depending on the service provider and the services offered.
In addition, it is also worth considering other alternatives to managing investments, such as using an online broker or investing in a target-date fund. These options may have different fee structures and investment strategies that could be better suited to an individual’s financial goals and investment preferences.
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