robo investing

“Robo investing” is a term that has recently come into common use to describe a form of online automated investing.

The investor inputs his goals, investment horizon, risk preferences and other pertinent data; software selects and implements an investment plan.  Fees for this service range from zero to 0.50% of the assets under management per year.  Services are either independent websites or free add-ons from discount brokers.  In addition to being low-fee, robo investing services are also available to investors with extremely small amounts of money to invest.

not a new idea

Although robo investing as a freestanding online service is a recent development, the idea itself is not new.  It’s an essential tool that’s been used by traditional (“full-service”) brokers for a long time.

Several differences, though.  For traditional brokers:

–I’ve always viewed computer analysis as part of the traditional broker compliance effort.  Over the years, fearful of litigation and aware of the high costs of training, traditional brokers have reshaped their salesforces from being purveyors of independent (and sometimes half-baked or worse) stock and bond trading ideas to marketers of investment products/plans prepackaged at central headquarters.  Automating the development and implementation of a standard investment plan helps ensure that the broker does his fact-finding and only recommends suitable products to clients.

–the products recommended are typically taken from a limited range of high-cost “load” funds, at least some of them manufactured by the brokerage firm itself.  Sometimes, only products whose makers pay the broker a fee will pop up on the automated recommended list.

–management fees can range as high a 2% of the assets under management yearly.

As I see it, the main differences between old school robo investing and its new counterpart are:

–no human interface,

–a different range of products, and

–considerably lower cost.

More tomorrow.