An Online Financial Advisor (Robo) comes in 3 Flavors

online financial advisor 3 typesPaladin recently published online research reports for 18 Robo Financial Advisors. Before we conducted the research we thought there would be one, widely accepted business model for a Robo adviosr. That did not prove to be the case. We found there were two versions of real Robos and an Online Financial Advisor category that is being lumped into the Robo category.

In case you haven’t heard of Robos, they are financial advisory firms that offer planning and/or investment services. The true Robo advisors use automated investment processes to manage your assets. They deliver all of their services over the Internet.

To get started, you complete a short assessment questionnaire and their computers do the rest. You are assigned to a model portfolio that is based on your questionnaire responses. Computers select investments, allocate assets, rebalance, harvest tax losses, and produce performance reports.

Most of the Robos invest in low cost Exchange Traded Funds and Index Funds that are managed by iShares and Vanguard. Some Robos provide portfolios of actively managed ETFs, mutual funds, and securities. One of the main features of Robo advisors is their low expense ratios. Many of them charge asset-based fees of 0.35% or less.

So what are the three types of an Online Financial Advisor (Robo)?

Robo Advisory Services (No Human Contact) 

Your money is invested in model portfolios that are run by computer programs. There is no human contact that increases expenses. You will know you are dealing with this type of Robo when there are no telephone numbers, email addresses, or Contact Us function on the Robo’s website.

Robo Advisory Services (Limited Human Contact) 

The investment process is the same. Your money is invested in model portfolios that are run by computer programs. However, in this case, there is limited human contact by email or telephone. However, the contact person may be a customer service professional and not an investment professional.

These types of firms may flourish as increasing numbers of investors become more comfortable letting computer programs invest their assets in model portfolios. Their markets may not be limited to younger investors, Millennials and Gen-Y’s, who are comfortable letting technology do the work. 

Online Advisory Services (Limited Human Contact)

These firms do not provide automated investment processes. Consequently, they should not be considered Robos. They provide tailored financial solutions and substantial amounts of online information. In this case, you have access to real, live investment professionals, but the contact method is limited to telephone and Internet. There is no face-to-face contact between you and the advisors.

Curious to see who’s on the list of Online Financial Advisors that we researched?  Click here.

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