Why should you know where robo advisors invest?
7th July, 2020.
Robo advisors aim to invest clients' money across a diversified basket of funds. The underlying objective is to deliver optimized risk-adjusted returns in a scalable model.
Interestingly, even though most robo advisors profess to be inspired by the modern portfolio theory (pioneered by Harry Markowitz), the actual allocations and resultant returns tend to be quite different.
Many robo advisors simply invest funds across a basket of stock and bond ETFs. Some of them also provide allocation to alternative asset classes, such as real estate, gold, and, in some cases, cryptocurrency.
For retail clients with long term investment objectives, it is useful to understand where robo advisors invest their funds.
4 important considerations for investors, besides historical return and risk, are:
1. How well is the portfolio diversified, by itself and with respect to your existing investments (stocks, real estate, gold)?
2. What are the fund expenses of the underlying ETFs?
3. What is the annual advisory fee (and other expenses) charged by the robo advisor?
4. Do the underlying ETFs consistently adhere to the theme of the portfolio, such as ESG or Halal?
Knowing and understanding all of these will help you decide on which robo advisor to use to meet your long-term financial goals.
