Robo-Advisors in Trading: A Brief Walkthrough

Robo-Advisors in Trading: A Brief Walkthrough

Trading has taken a drastic turn from the initial days when manual trading with an offline broker was the only form of trading in the world. However, in recent times, many platforms have used automated technologies that help traders understand their trading decisions better with the help of pre-defined market data.

Robo advisors are automated digital platforms that use algorithms to get investment advice and help manage traders’ portfolios. Due to their low-cost objective analysis and extreme convenience when compared to traditional financial advisors, they are gaining increasing popularity in recent times. They are especially beneficial for beginners in investors as they help make better investment decisions and also manage their portfolios effectively.

Understanding robo advisors

The robo advisor platforms today use passive indexing strategies, which are optimized with Modern Portfolio Theory. This means the investor on this platform cannot choose which ETF, stock, or mutual fund to invest in their account. Some offer optimizations for Halal investing, provide tactical strategies that mimic hedge funds, and help socially responsible investing. In addition, the robo advisors can also handle sophisticated tasks like retirement planning, tax-loss harvesting, investment selection, and much more. Most robo-advisors are in the name of an automated investment advisor, digital advice platforms, or automated investment management.

Benefits of robo advisors

There has always existed a financial barrier between traditional investment and financial services and the customer’s or traders’ interest in investing their money. However, this barrier is becoming thinner by introducing automated platforms with pre-defined goals, and more and more people can gain transparent access to trading platforms.

  • They are low-cost alternatives to traditional trading advisors. It eliminates the middle man and human labor, thus producing a transparent trading experience.
  • The annual flat fees produced by robo advisors are less than 0.5% per amount managed. Compared to human trading advisors, it is 1% to 2% less.
  • Robo advisors produce more accessibility. As long as the traders have an internet connection, they can reach them anytime, anywhere in the world.
  • It is more efficient. Before the invention of such advisors, people had to call or meet a financial advisor in person and specify their needs to make a trade. However, now they can do so, with a few clicks from anywhere in the world.
  • Using robo-advisors can limit financial and investment options. But, in the trading world, this is considered a boon because investing in individual stocks can lead to poor financial results. By undertaking an indexing strategy, traders can often make better profits.

robo advisors

Limitations of robo advisors

  • There are doubts regarding the viability of digital advisors as a one-stop solution for wealth management
  • Such platforms lack sophistication and empathy
  • They provide limited options for retirement planning, estate planning, and other trust fund administration investments


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