NOT FINAL

 

Recently, there has been a significant growth in the number of robo-advisors – online wealth management services that operate in the place of a traditional financial planner to provide portfolio management functionality to a broader audience. Robo-advisors have gained significant market share by offering a limited selection of services at lower cost compared to an in-person advisor. These services are commonly ones that are traditionally driven by software even when offered by an in-person advisor, such as portfolio management [1]. In particular, robo-advisors have proven very popular with newer investors looking to manage a small- to mid-sized portfolio, as they have less need of more complex services offered by in-person advisors.

Before the rise of robo-advisors, most people resorted to mutual funds. Mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. It allows people with small accounts to invest, provide diversification, and provides a professional money management service. However, it is known that mutual funds suffers from nontax-efficiency, subject to the herd, and costs that may have a detrimental effect on performance. (Source: http://www.investopedia.com/ask/answers/10/mutual-funds-advantages-disadvantages.asp).

One major difficulty of the people who wanted a more sophisticated investment management was that the intial investments that hedge funds require were usually very big.Typically, a minimum initial investment that hedge funds accept is between $500,000 and $1 million. (Source: http://www.forbes.com/2000/07/15/feat.html) Also, more successful hedge funds have a much higher minimum initial investments.

This puts a lot of restrictions and limitations on most regular people. It would be fairly rare to have someone that holds $500,000 in cash to invest into a hedge fund. However, these people, like you and I, also have financial goals. We understand the need to invest, to continue to save and grow our capital for future convenience. For example, saving up for retirement, housing, cars, etc.

In addition, I would like to add that it does not provide people with the right service with respect to different goals that people may have.

Robo-advisors are