You have probably seen talk of “robo advisors” in the media. The articles I have read pay much attention to the new robo advisor firms, and their sources of venture capital, but little to the potential impact on the investors they are supposed to be helping. So what are robo advisors, and how will they affect the way investment advice is provided?
Investopedia defines a robo advisor as “an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners.” My layman’s explanation is that robo advisors automate the gathering of information from potential investors through a computer-based questionnaire, and then feed the answers into a computer based model which produces recommendations for an investment portfolio. In its purest form a robo advisor removes the need for any interaction with a human when deciding how to invest your money.