Robo Traders: Terminator Or Transformer?

First Phase Media
April 26, 2021
minute read

Earlier, investing in the stock market was often considered costly and reserved for the experts. You either needed to have investment expertise yourself or hire a professional which was a costly affair as you not only needed a huge sum of money to get started but also pay them higher fees. 

But thanks to the advent of robo traders in the last decade or so, this notion has significantly changed. Now anyone with limited funds and knowledge can start their investment journey by answering a few simple questions. This process is automated, cost-effective, and backed by strong investment strategies.

Having said that, it’s important to know whether or not robo trader is the right choice for you. This article gives you a detailed insight into the pros & cons of this automated software so you can get a better understanding of these platforms.


What Are Robo Traders?

Robo traders, also called Robo advisors, are online investment management services that are designed to provide automated financial advice with minimal human intervention. They allocate your assets efficiently by using algorithms that allow the entire process to operate automatically.

Robo traders allow you to start investing with little to no minimum requirement of assets and can get you started with your investing journey in a matter of minutes. Some robo advisors are fully automated, while others provide human assistance to answer questions. In both cases, you get access to customer service for resolving any issues. 

How Do Robo Traders Work?

Robo advisors use preset algorithms designed by financial advisors, investment managers, and data scientists, that are executed by advanced software to automatically build and manage your investment portfolio in the most effective way. 

They make use of an online survey to gather information about your financial position, degree of risk-aversion, and desired ROI to create financial advice for you.

While they can provide services ranging from portfolio creation to tax optimization, you can choose your desired services between the offerings. 

Understanding The Pros & Cons

Robo traders can seem like the perfect option for hands-off investment but understanding its pros and cons is essential before you decide whether or not to opt for it. 

Let’s look at its plus sides and downsides to understand if a robo trader is the right option for you.

Advantages Of Using Robo Traders

Robo-advisors are a cost-effective way to automate your investment management. They are getting increasingly popular for gaining access to the markets and for good reasons:

  • Low price and minimum balance: Robo traders are an inexpensive way to hire financial advisors for investment management as opposed to human advisors who charge at least 1% of your assets. Robo advisors on the other hand can provide assistance for as low as 0.25% of your assets. Trading with such software also doesn’t require you to have any minimum account balance to start your investment journey.

  • Ease of use: You can use robo traders through the convenience of your mobile phones or web applications. These types of software also give you access to a range of portfolio management tools which makes the entire process much more flexible and user-friendly.

  • Cutting-edge investment research: Many of the robo traders’ algorithms are based on cutting-edge investment research and Noble-prize winning investment theories which generally strive to create maximum returns for the smallest risks. 

Disadvantages Of Using Robo Traders

Although they offer cheaper and faster investment services, they lack in the following aspects:

  • Lack of fully personalized service: While robo traders allow you to set and edit your goals, it doesn’t understand you as a human and is unable to give you explanations or assist you during real-time downs like in case of a market crash or any financial issues. In general, the software’s algorithms build portfolios for you based on online questionnaires. A human advisor, on the other hand, offers you more personalized services.

  • No human interaction: If you are someone who wants the financial advisor to talk you through the entire investment process, robo advisors might not be for you. They lack the direct interaction between client and advisor which only human financial advisors can provide.

  • Lack of expertise: Robo advisors provide you with needed resources and tools to execute trades, build portfolios, and automate the process but lack the expertise for providing an array of different financial services provided by human advisors. 

Things To Consider

If you are looking to hire a Robo trader for your portfolio management, you should consider the following points:

  • Financial position: If you are a new investor who wants to diversify the portfolio with a limited net worth, Robo traders can be for you as there is no minimum account balance required to start trading with these platforms and the fees charged is usually on the lower side. 

On the other hand, human advisors are costlier but often offer a wide array of services along with portfolio management such as goal planning, estate planning, retirement planning, and more, which may be important to you.

  • Portfolio management: Robo traders make use of online questionnaires designed for analyzing your investment goals and risk tolerances to build your portfolio. Based on your answers, their algorithms build 5-10 portfolio choices for you. 

The interaction here is minimum and lacks the human touch. With human advisors, you can have live communication to guide you with your assets on a regular basis.

  • Investment options: In general, Robo advisors are designed to invest your assets in exchange-traded funds (ETFs), which is a good way to diversify your portfolio. But if you want to invest in other products or you want to trade individual stocks, commodities, or currencies, a human advisor can help you more to do so.

What We Think About Robo Traders 

The robo-advisory domain is still relatively new. While these platforms can provide cheap, easy-to-use automated trading experiences, they don’t come without flaws. Robo traders can vary depending on the firms configuring and handling them. Also, cost-effective advice is not always necessarily the best. It is always advisable to do your own research about how their algorithms work before accepting their investment suggestions.

Having said that, if you want to opt for automated investment management, these companies develop the best Robo traders in the market.

  1. WealthFront: Best overall and for socially responsible portfolio

  1. Betterment: Best for beginners and cost-effective solutions.

  1. Sofi: Best for extra investing perks.

Final Thoughts

If you are looking for long-term investment, both robo-traders and human advisors can be beneficial for your financial growth. However, depending on your preferences and goals, one can outweigh the other. 

For example, if you are a new investor with limited funds looking to diversify your portfolio, robo traders can be a cost-effective way to manage your assets. On the other hand, you can opt for human advisors if you are looking for a broader range of personalized services for a greater amount of assets.

If you are confused between the two, another option that you can use is the hybrid robo trader model or online financial services that offer a mix of automation and in-person assistance.