Robo Advisor

Guide about Robo Advisors

Definition of a Robo Advisor

If you’re wondering what a robo advisor is, you’re visiting one right now. inbestMe is a robo advisor and therefore we can give you full details about Robo Advisors.

The origin of the term Robo Advisor comes from combining the words robo (robot) and advisor, that is, a robotic or automated advisor.

Robo Advisors are also known as automated managers, since in fact, besides advising, they manage your money for you. So a Robo Advisor is a kind of financial advisor that offers an online investment portfolio management service through algorithms, automation, and is usually supervised by a team of expert investors.

Robo Advisors make it easier to create individual investment portfolios for each person, tailored to their possibilities. Portfolio creation and maintenance is fully automated.

The automated manager does it all:

  • It creates your plan according to your situation and objectives
  • It invests for you with expert investor strategies
  • It optimizes your portfolio continuously
  • It makes changes when necessary
  • It manages your additional contributions

Thanks to automation, this new alternative for capital management offers investors lower costs, and consequently, better returns.

The most common characteristics of Robo Advisors are:

  • Automation
  • Delegated portfolio management
  • Low costs
  • Accessible with much less capital
  • Use of passive instruments

Other less common features:

  • Passive/active management
  • Transparency
  • Independence
  • Customer service with a digital bias
  • Global investment

Origin of Robo Advisors

The first Robo Advisors appeared in 2008 in the US market. They were established with the aim of offering a service for simpler, smarter, more diversified investment. Before their appearance, human financial advisers, not robots, used wealth management software to automate work, with a commission of between 1% and 3% of investible assets. Riding on their great success in the US market, they entered the Spanish market in 2014. Although they have not yet achieved the same success in the Spanish market as in the United States, Robo Advisors are stomping in on the financial market and great growth is expected in the coming years.

How does a Robo Advisor work?

The typical investment process for a Robo Advisor consists of 3 main steps.

  1. First, client do a test that lets us establish what their financial objectives, capital situation, knowledge of investment and their psychology is.
  2. Once the user’s investor profile has been established, the Robo Advisor assigns an investment portfolio adapted to the investor’s risk profile.
  3. Finally, the investors open their account, transfer the capital to be invested, and the Robo Advisor takes care of the rest, periodically rebalancing and optimizing their investment using different algorithms.

Top Robo Advisors (2023)

The most important Robo Advisors in the US market are:

  • Betterment: The biggest independent robot advisor, which manages $13 billion with over 300,000 clients.
  • Wealthfront: This robot manages about $9.5 billion. Featuring over 150,000 clients.
  • Wealthsimple: This Toronto-based Robo Advisor had $1.9 billion in assets under their management in 2018.

The European markets feature:

  • Scalable Capital: Manages €1 billion in client’s assets, with over 30,000 clients.
  • Nutmeg: This London-based robot is growing fast. According to data collected in 2017, it had over 50,000 clients and £1bn in assets.
  • Moneyfarm: a European Robo Advisor that keeps growing, in 2018 it managed £400m for 27,000 active investors.

Robo Advisor myths

Some investors are reluctant to use Robo Advisors as an investment tool as they think that it is a robot that decides where to invest.

However, that is not the case in the vast majority of cases. It is actually humans, expert investors, who decide where to invest. These are usually driven by long-term strategies. The robot automates everything that can be automated in order to avoid errors, save on costs and simplify the investment process.

Even though more and more people avoid going to their local branch to do banking business, another myth about Robo Advisors is that they cannot offer personal treatment. And that is not entirely tight either. It is in fact true that a Robo Advisor will not be able to offer such a personal, face-to-face treatment as that of traditional banking. The fact is that if it did, it could not offer the very low costs on offer. However, behind the phone call, chat, video call… there will always be a human ready to help you.

What kind of client invests with Robo Advisors

Robo advisors are accessible to all kinds of clients, although the user profile that stands out most is people who feel at ease in the digital world, with technology, engineering, computing and finance.

People who seek the services of Robo Advisors generally want personalized advice to improve the returns of their portfolios and their savings.

What is most striking is that most users are men, and there are not all that many women who seek this type of service. Why? One reason is that, unfortunately, men have historically been better paid than women. However, as society redresses the income gap between men and women, it is to be expected that the number of women investing with Robo Advisors will balance out with the men.

As to age, 40- to 60-year-olds are predominant. Most live in large cities and have an average equity holding of 60,000 euros.

To sum up, automated managers are ideal for those who do not have time to manage their investments, who prefer to invest long-term, and want to start investing with little capital and diversified portfolios.

Robo Advisors and Tax

Concerning tax, Robo Advisors generally apply similar strategies to traditional services when it comes to face taxes:

  1. Using assets that in themselves provide tax advantages, for example investment funds (transferable).
  2. Using instruments that are specifically designed to obtain tax deductions, for example pension plans.
  3. To a lesser extent, applying specific tax optimization techniques.

In Spain (the only country in the world) it is possible to availing oneself of a tax deferral using transferable investment funds. Spanish investment funds are transferable. But foreign investment funds are also transferable if they register with the CNMV and have more than 500 participants.

In Spain, thanks to this tax deferral, when ordering the transfer, the money reimbursed from the source fund never passes via the participant, so there is no obligation to pay taxes at the time of the transfer and the money is used directly to subscribe the destination fund.

Remember that this possibility of applying deferral is only applicable to natural persons residing in Spain. In other words, a non-resident Spaniard may not apply this procedure, nor can a company.

Thus most Robo Advisors in Spain set up portfolios of transferable investment funds, which means that by definition they can use the transferability procedure for investment funds. This implies the following:

– When an investor transfers funds from another institution to the Robo Advisor, there will be no tax impact (if there are accumulated capital gains)
– When rebalancing or changes are made from one fund to another while they are transferable, no tax will be applied in the process

However, you must remember that:

– The possibility of applying this deferral is only applicable to natural persons residing in Spain

It should be remembered that deferral is not an exemption, it is simply a deferral or delay in the tax bill on capital gains. When we finally liquidate our positions, the corresponding taxes will be accrued on all the capital gains generated.

Even so, once it is understood that this is not a tax exemption, tax deferral is a component that helps improve the final returns due to the fact that we are also earning returns on the unpaid tax. This additional return will be as important or more important depending on the real return obtained by the fund or portfolio.

But on the other hand, it will be unimportant if performance is poor. Put to the extreme, if the yield is nil there will obviously be no tax benefit either. You can learn more on the subject in this study on the real effect of tax deferral.

Robo Advisors and the Long Term

In general, all Robo Advisors invest long term and they are not recommendable for investors who want to obtain sizeable returns in a short amount of time. In fact, we never recommend investing any capital that will be needed within the next 3 years, since in short periods the market may well be very volatile.

Robo advisors invest long term, since in this way they take advantage of the upward trend in the markets and they can offer considerable returns compared to the speculative investor. Numerous studies show that a good formula for success in the investment world is to establish a systematic plan with as long a view as possible.

In addition, thanks to the long term position, the investor can benefit from compound interest, the “magic” formula that increases returns exponentially as time goes by.

Another long-term benefit of investing with Robo Advisors is lower costs. By carrying out fewer operations, either selling or buying, the Robo Advisor can offer lower costs than those offered by traditional management services.

Robo Advisors and Algorithms

One of the great characteristics of Robo Advisors is the fact they are automated. Such automation is often based on algorithms. By using algorithms, the Robo Advisor can perform all those tasks where a person does not add value more quickly, efficiently and economically. For example, a Robo Advisor’s algorithms are responsible for:

  • Creating the investment portfolio (previously established by an expert investor according to Nobel Prize models) according to the parameters of each client: risk level, time horizon, etc.
  • Applying such rebalancing as necessary to keep the portfolio aligned with the original distribution.
  • Managing buying and selling to improve the tax situation of a portfolio.
  • Assisting in operations to change strategy or tactical adjustments depending of the situation of the markets.

Robo Advisors and ETFs

Many Robo Advisors use ETFs to create portfolios that are tailored to the risk level of the investor’s profile, the horizon of their investment and their financial goals.

They use ETFs for various reasons:

  • Because of their broad diversification, that is, when the investor buys into an ETF, he is really buying myriad stocks and other investments in bonds.
  • Another reason is that they are passive and thus seek to obtain the same results the stock market offers, making it possible for the investor to obtain the same return as the market without the additional costs implied by attempting to outperform the market.
  • They are very transparent, so the investor will know what assets the ETF has at all times and if it is doing its job.
  • They are easy to buy and sell.
  • They offer low fees.

Perspectives on Robo Advisors

“The use of Robo Advisors has been an evolution of the technological tsunami, which has devastated traditional banking, and affects the financial services industry. The financial crisis has caused user discontent towards traditional banking, and this has helped fintechs and Robo Advisors to develop at a rapid pace to serve consumers of certain banking products in the best possible way. Robo Advisors have helped to focus users of banking products on certain financial services, making the entire process simpler, more efficient and transparent at the cost level.”

“Roboadvisors offer a simple, straightforward and comfortable investment solution, which fits very well with the needs of certain types of clients. Especially for people who have some saving and investment capacity, but not enough to have access to a personal financial advisor. But also for a profile accustomed to the use of the Internet that is increasingly moving outside the traditional banking sector. They have enormous growth potential, not because they are going to be the star service, but because it is a giant market in which they start from almost nothing. Remember that going from a market share of 0.1% to 1% means multiplying by 10. And in this sector that is many millions of euros. The big challenge for all these projects is how to differentiate from each other. Precisely, the great advantages of comfort and simplicity become a threat from this point of view. For this reason, it is essential to invest in generating a brand, in achieving customer recognition, and offering a high-quality service in terms of usability and customer service.”

“I think we are definitely entering a phase 2.0 of robo-advisors. The promises of the robo-advisor boom (which in the United States were more than 5 years ago) have only been partially fulfilled. In general there has been a puncture in robo-advisors around the world in clients and assets captured.The focus of this second phase of robo-advisors will be more on personal finances than on portfolio management, and the great challenge is not going to to be not only in the financial product (which, in a way, has already been invented) but in everything that is correcting the behavioral deficiencies of humans (of the client and the human adviser) when making savings and investment decisions. It will be a phase where some of the robo-advisors that disappointed expectations survive and start to benefit from truly disruptive growth rates, which are now very hard to appreciate.”

“In my opinion, in the medium term, roboadvisors are going to become a real alternative to investing in banking products, that is, they will be known by the majority of people who want to start investing. It is a matter of getting the message of the importance of costs and independence in management. Something that is basic and that too many people are unaware of. Traditional banks continue to have a lot of influence on these decisions and opening the minds of small investors is a fight against the current. Even so, I firmly believe that sooner or later the population will open its eyes. It’s a matter of patience and persistence.”

“We believe that investment in roboadvisor has only just begun in Spain and that from now on they will experience exponential growth, just as they have done in the United States, where confidence in this type of investment is equal to investment in the other traditional funds In Spain we are more reluctant to new forms of investment or savings, especially when the Internet is their main medium, but with the new generations everything indicates that a promising future awaits roboadvisors since their presence and management is fundamentally through the network and that generates more confidence and attraction for young people. Therefore, we expect to see growth in the money managed in the coming years by the main Spanish roboadvisors.”

“Fintech companies are revolutionizing the financial sector; they use state-of-the-art technology, are comfortable, fast and have very low costs. They are therefore an attraction for any user of generation X and Millennials accustomed to the use of new technologies and looking for alternative digital methods. It is not surprising that robodivisors are gaining so much strength in Spain; fortunately we are experiencing this change in the Spanish investment culture. The high commissions and low profitability offered by traditional banking have made investors explore new more affordable, simple alternatives and at the same time with high profitability and diversification.It is for this reason that robo advisors are growing at a fast pace and considered by many as the investment of the future.The customization of the portfolio and the great variety of investment strategies makes this product a suitable option for any investor.”

“Robo advisors more than satisfy the investment needs of the majority. Without having any knowledge of finance, they allow anyone to have a fully diversified portfolio, customized to their level of risk and with a return that in the long run crushes investment funds.” traditional investments. All this with commissions so low that banks simply cannot compete. It is a matter of time before people realize it and allocate a percentage of their savings. In the coming years, as Spanish society acquires a financial culture due to Due to uncertainty about pensions, automated managers will experience unprecedented growth Currently, and it is expected to become more pronounced in the future, there is a flight of capital managed by banks to robo advisors, which will acquire similar market shares to more financially advanced countries like the United States.”

“Robo advisors are a way to invest in low-cost index funds automatically, without worry on your part. Although in Spain it is still a relatively new product, in other countries it is already equal to active management and everything indicates that the same thing will happen here. In this sense, we think that initiatives such as InbestMe will help to popularize this system and make it even easier for all those people who want to start in this type of investment.”

“Robo advisors are a great way to invest your money. Thanks to their portfolios indexed to the main economies of the world, ordinary investors can invest in the right assets. Little by little, more and more people will realize their advantages over investments from traditional banks, and as financial education improves in our country, robo advisors will become one of the main players in investment in Spain.It is only a matter of time before this low-cost investment model commissions, high profitability and great diversification are becoming more popular and small savers can benefit from it. It is clear that robo advisors are here to stay.”

“I have been investing in robo advisors since 2018, inbest me among them. When I started investing I did not find a strategy that suited me 100%, until I discovered robo advisors. Thanks to them I can invest my money without complicating myself, without spending time and having a portfolio adapted to my investor profile. In addition, I have a portfolio made up of the best index funds on the market, something that even Warren Buffett recommends. In my opinion, robo advisors will only grow, and that is that people will You will realize that they are the best alternative for those who do not want to dedicate time to their investments and still obtain fantastic returns.”