Imagine you are an young investor with an IRA account of $50,000 and turned away by an asset manager? This is a real-world scenario and happens with all the firms forced to shun such low-cost accounts, as they don't provide much return on investment.
To overcome this issue, many wealth management firms are turning into robo-advisors. A robo-advisor provides portfolio management services online without the use of human financial planners. Although robo-advisors use the same software as traditional advisors, they offer only portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning.
Related Link: Meet The Middle East's First Robo-Advisor
Alpha Architect, an investment advisory firm, cites out three reasons why an active robo-advisor can add value.
"We believe stock prices aren't perfect: The research is clear: Non-closet-indexing portfolios, with value and momentum characteristics, generate higher expected returns than passive portfolios," Alpha Architect said in a blog post.
Alpha Architect said it believes in downside protection: simply maintaining a "buy and hold" approach won't get you there. Protecting a portfolio from large losses matters and trend-following seems to be a reasonable approach.
Moreover, robo-advisors offer affordability and affordable active solutions can create long-term win-wins. With the help of robo-advisors, one can serve many small clients.
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