Some are purely algorithm-driven guides that overlay existing accounts and tell investors what to buy, sell or hold. Others offer managed accounts or portfolios with little or no human interaction. And some do provide access to a human advisor—but only via phone calls, emails and video chats.
All cater to a digital native mind-set that smart and powerful technology is superior to a human service provider. Think Priceline.com or Kayak.com and the impact they have had on the travel industry—and travel agents, in particular.
Ostensibly, robo-advisors may address the underserved population of investors who do not have large enough accounts to meet traditional wealth management minimums. Or they can move up-market to serve sophisticated investors who have lost confidence in the traditional broker or advisory firms.
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The young, tech-savvy demographic might find a robo-advisor a particularly useful tool for managing investment needs. An algorithm can theoretically make better and more precise decisions about exact asset allocations, the use of investment products and when to execute various changes to the portfolio.
This process should make those decisions in a more cost-effective manner than a human advisor can deliver. This theoretical proposition, if substantiated, might provide small account holders with a superior way to manage their investments when compared with a costly, and likely unsophisticated, financial advisor.