Robo-Advisor – the battle between man and machine

As someone who is open to new trends but still questions them, it was clear to me at this point that I had to take my friend’s rose-colored glasses off. When it comes to the important topic of investing money, you should take a close look and consider various aspects. Robo-advisors are cheaper in comparison, no question about it. But is that really enough to replace the good old flesh-and-blood investment advisors? What are the differences? And are there any potential risks associated with the use of robo-advisors?

What are robo-advisors anyway?

But let’s start with a simple definition. For those who are not yet familiar with the term: Robo-advisors are digital platforms that use algorithms to make automated investment recommendations based on customer information such as risk profile and investment goals. In addition, the assets are managed and invested fully automatically, so that the investor supposedly does not have to worry about anything and saves costs compared to a traditional asset manager.

How the automated robo-advisor works

It is often said that the way robo-advisors work makes them suitable for investors who prefer a straightforward investment strategy. So let’s take a closer look at how they work:

1. Account opening and information gathering: First, the robo-advisor guides customers through a digital questionnaire. Here, financial goals, risk tolerance and the general financial situation are recorded.
2. Portfolio creation: Based on the information collected, the robo-advisor automatically creates a suitable investment portfolio. This often consists of exchange-traded funds (ETFs), with which robo-advisors offer broad market coverage.
3. Portfolio management: The portfolio is managed and optimized fully automatically using software algorithms.
4. Automatic transactions: All necessary transactions, such as the purchase and sale of securities, are carried out automatically by the robo-advisor.

The risks of robo-advisors – why asset managers still come out on top

Fully automated, cost-effective, convenient and simple – these are the advantages that are repeatedly mentioned. Robo-advisors are touted as ideal, especially for investors who have no previous experience with securities. But as is so often the case in our world, the same applies here: All that glitters is not gold.

Despite their low costs and ease of use, robo-advisors harbor a number of risks. They are like those fancy robot vacuum cleaners. As long as everything goes according to plan, they do an excellent job. But woe betide them if they hit an obstacle on the floor! It’s similar with robo-advisors: they’re great as long as the market is stable. But as every investor knows, stability is not permanent. As soon as complex situations arise, robo-advisors can literally trip over their own digital feet. Their standardized portfolio also poses problems, as there are no individual investment solutions. And who wants to put everything into a “one-size-fits-all” portfolio?

Asset managers provide a personal touch

A wealth manager takes the time to listen to your story, your dreams and, if applicable, any negative stock market experiences – in-depth discussions that go far beyond standardized questions. You will receive tailor-made investment advice and individual investment strategies. Personal changes, such as marriage, the purchase of real estate or retirement, are also taken into account. A robo-advisor, on the other hand, is as personal as the voice assistant on your smartphone – always polite, but about as emotionally involved as a slice of toast. Sure, it asks about your risk profile and your goals, but does it understand what you really care about and what your motivations are? He also has little to do with personal changes or individual wishes.

When the market is on a rollercoaster, nothing can replace the flexibility and experience of an asset manager

Imagine the stock market as a sea – sometimes calm, sometimes raging and unpredictable. The human asset manager is an experienced captain who has weathered many storms. He knows the tricks to maneuver the ship safely through the waves. And the robo-advisor? It is more like an automatic steering system that navigates according to a set route, regardless of whether the storm threatens to sink the ship. In unexpected situations or in times of crisis, wealth advisors have the invaluable advantage of being able to react to market changes thanks to their many years of experience. They make quick decisions and adjustments that minimize the damage and even take advantage of opportunities in the crisis – a skill that goes far beyond the programmed reactions of an algorithm.

Despite technology in robo-advisors: the human touch remains irreplaceable

How do you decide when you can choose between a digital algorithm and a human expert who can navigate you safely through the unpredictable waters of the financial world with expertise and extensive experience? For me, the answer is clear: technology is fabulous, but when it comes to my hard-earned money, nothing beats professional asset management. Because especially in stormy times on the markets, my experienced asset manager is the captain who steers my investment ship through any danger. Instead of listening to emotional impulses and pressing the panicked “sell” button at the wrong time – as I and perhaps you would do – my asset manager remains calm and level-headed. With his many years of experience and well-considered strategies, he responds specifically to my emotions, calms me down and protects me from emotional decisions that destroy my returns – something that neither a robo-advisor, nor an AI, nor even a real tape-recorder voice can do!

With this in mind, sometimes the best investment in your financial future is not advanced technology, but an intimate conversation with an experienced wealth manager who understands you.

Yours, Mark Stock©

Mark Stock is a member of the Point Capital editorial team. “I am a stock market enthusiast and am passionate about economic history. I have been following the ups and downs of the markets for years and, of course, invest myself – preferably in shares. So my name says it all. Every month, I take up what I consider to be an exciting topic. And since the focus is on the content and not on me personally, I write under a pseudonym.”