What is a robo advisor?
The term robo advisor literally means “robot advisor” and refers to digital financial planning services – from investment advice to automated asset management. Robo advisors are using intelligent technology to provide more and more people with access to services that were previously only accessible to high-net-worth customers. Until now, the broad middle class has had to settle for offers from the bank or financial intermediaries, which often come with high fees and a mediocre return.
Wealth managed by robo advisors:
only in Germany (projection at the end of 2020)
What does a robo advisor do?
The term “robo advisor” is not subject to any legal definition and therefore includes a wide range of services, which may vary depending on the provider. Ultimately, the regulation of the Federal Financial Supervisory Authority (BaFin) decides whether a provider can only assume a mediating function (financial asset intermediary) or can take over the independent management of the invested amount (as a licensed wealth manager). The latter is referred as financial wealth management, regulated in accordance of §32 of the German Banking Act (KWG) and is directly regulated by BaFin, the highest supervisory body on the German financial market. The license for financial wealth management involves automatically making adjustments to the investments of their customers and thus comprehensively responding to the interests and objectives of the customers, such as the desired risk level and preferred asset classes. Of course, only after the client has given the one-time consent at the beginning of the wealth management mandate.
How can I invest money with a robo-advisor?
#1: The difference between an active and a passive robo advisor
The broad definition of the term also distinguishes the investment strategies and risk management approaches of different providers. Basically, robo advisors can be classified as “active” or “passive”. But what exactly does that mean?
Robo advisors pursuing an active investment strategy use an algorithm and/or expert assessments to predict price fluctuations and developments. According to these forecasts, the portfolio is proactively adjusted to meet the customer’s risk tolerance in order to benefit from the anticipated price developments. This means that if the calculated risk of loss of the current portfolio increases, a reallocation is made before the loss is realized. The basic consideration of such an active risk management system is that the profits of early redeployment exceed the higher transaction costs and tax deferral effects, and thus additional income can be realized. However, this approach often fails because developments in financial markets are unpredictable and shocks occur unexpectedly and very quickly.
Passive robo advisor
A passive strategy, on the other hand, means that the portfolio put together for the client is either not adjusted at all (buy-and-hold) in the course of the investment, or only the weighting of individual asset classes is adjusted according to price developments and returned to the original state (rebalancing). This technique depends on how the relationship between asset classes to each other changes over time. The portfolio is relocated at regular intervals, which means bond and equity shares are purchased and sold in order to restore the risk weighting originally desired by the client. The basic strategic consideration of passive robo advisors is to minimize transaction costs and thereby keep costs for their customers low.
#2: How do robo advisors work?
1. After researching and selecting a suitable robo-advisor, the investor answers a questionnaire in order to determine the individual risk preference, the planned investment duration and the investment amount. Optionally, a monthly savings rate can also be set up.
2. The robo advisor evaluates this information and proposes an investment strategyto the investor that is appropriate to his information. The investor can choose a strategy based on these proposals.
3. Subsequently, the investor’s data is transmitted to the partner bank, which opens a deposit for the investor. The robo advisor does not have direct access to this repository. Deposits and withdrawals as well as changes to the savings amount can be ordered at any time through the robo advisor.
4. In accordance with the chosen investment strategy, the custodian bank invests in suitable securities. However, these do not include speculative derivatives, as most robo advisors offer only strategies based on ETFs and index funds due to their long-term orientation.
5. The robo advisor invests in the appropriate securities according to the chosen investment strategy. Purchases and sales are processed automatically, saving significantly on costs that are passed on to you as a customer in the form of lower fees.
6. If desired, the investor may dissolve the portfolio at any time in order to have the proceeds paid out. However, the investment period should be at least five years to benefit from the long-term strategy of a robo advisor.
What do I do after I choose a robo advisor?
How do I choose a suitable investment strategy?
Where and how will my depot be opened?
How are the securities bought?
How is my investment managed after the opening of the deposit?
Can I cancel the portfolio at any time?
#3: Who are robo advisors for?
Thanks to the digital and automated offer, robo advisors are generally accessible to everyone. Above all, they offer a significant advantage for private investors and savers who want to invest their money in the long term and cannot or do not want to carry out time-consuming, independent research of possible forms of investment. The flexible offer of robo advisors in terms of risk profile, investment amount, deposit and withdrawal options as well as the establishment of savings rates and plans adapts to a wide range of customer needs and guarantees flexibility in investing. However, robo advisors are not suitable for investors with a short investment horizon. So if you only want to invest a few months, you should consider other investment options. It should also be noted that, as with all investments on the capital market, there is a risk of loss, which cannot be excluded even through technology. The portfolio will be exposed to market fluctuations over the investment period, but losses will not be finally realised until payment is made. Investors who want to invest their money in the next few years and do not want to make decisions on an ongoing way are therefore in the right place with a robo advisor.
What are the advantages of investing with a robo advisor?
Unlike conservative forms of investment, such as daily or fixed deposits, robo advisors offer the prospect of higher returns. These are, of course, linked to a higher risk than traditional interest rate investments, but this can be controlled by choosing an investment strategy that is suitable for the investor. For example, value-stable bond portfolios can be selected to which only a small proportion of equities are added as yield drivers. Algorithm-based securities selection also detects subtle differences in product structure between providers and has an important impact on returns. In addition, regular tax optimizations can also contribute significantly to the return.
The effort required to obtain information, select securities, transactions, and continuously monitor and optimize a portfolio is usually not in proportion to the results achieved by an investment organised by private investors themselves. Robo advisors save private investors exactly this effort and regularly align the portfolio with the individual goals and risk preferences of the client. Investors not only save time, but also benefit from the robo advisor’s years of capital market experience.
Robo advisors also score points in terms of transparency. Fees and their composition are available to investors in advance and clearly comprehensible. The preparation of an investor profile as well as the choice of investment strategy and the determination of risk tolerance are clearly defined processes, the results of which are based on the wishes, indications and objectives of the investors. In addition, robo advisors provide a complete overview of selected asset classes and products, so that investors are always confident about how the portfolio and its performance are composed. On the other hand, investing in an actively managed fund or taking out a fund-based insurance often resembles a black box in which the investor has no, or very poor, insight into his investment.
Since the financial products offered by a robo advisor are predominantly exchange-traded funds (ETFs) and index funds, the providers themselves convince by low costs. In addition, robo advisors do not usually charge commissions or performance fees, but charge a flat fee on the invested assets, plus the ETF costs incurred. However, these are significantly lower than the usual fees of other common forms of investment, such as traditional investment funds. The provider’s high transaction volume also makes investing in a robo advisor cheaper than an independent investment in the same securities. This is because robo-advisors can bundle transactions and thus have more attractive trading options on the capital market.
Conversely, the cost advantage achieved has a positive effect on your return, as this is less diminished by the fees incurred.
Robo advisors are independent in the selection of financial products used. This means that while bank financial advisors may be tied to specific product groups and recommendations, robo advisors select their investment modules based on strictly defined criteria and quality characteristics, laying the foundation for a successful asset building. These selection criteria are visible to each investor and at the same time exclude an emotional component in the investment. The investment in a robo advisor is therefore based on strictly scientifically based criteria and guarantees responsible, objective and algorithm-based decisions in the handling of your investment.
Professional risk management
Directly when setting up the depot, the individual risk preference is determined together with the investor, which can be flexibly adjusted retrospectively if required. Based on this risk profile, robo advisors put together a portfolio of different asset classes and products that focus on a scientifically based spread of risk.
Some providers actively restructure portfolios, others react to changing weightings of asset classes(rebalancing),while others do not adjust their portfolios at all (buy-and-hold).
However, all suppliers promise diversification by investing in different asset classes and regions. While one-sided weighting of investments is risky, portfolio diversification minimizes risks of a loss of value, as individual price fluctuations are less significant overall.
Availability at all times
The offer of many robo advisors can be used from a small investment amount, often even from a minimum investment of €1,000. This is mainly made possible by digital technology, which allows providers to serve even relatively smaller customers who would simply have been rejected by a conventional asset management company with a similar offer. In addition, the portfolio development and an overview of the entire depot can be conveniently accessed via computer, tablet, smartphone – and often also via a specially designed app. And many providers do not neglect the personal component either: Investment experts support you throughout the entire investment process through various channels from telephone and website chat to call-back offers.
What should I pay attention to when choosing a robo advisor?
Independent ETF selection
The portfolio components should be as broadly diversified as possible – at best globally, across different asset classes and according to transparent criteria. It is an advantage if the robo advisor has a license to manage assets. This is granted by the Federal Financial Supervisory Authority (BaFin) and allows the provider to take a holistic look at your portfolio. Not every robo advisor has such a license, this must also be taken into account when choosing a provider. As a licensed asset manager, Ginmon always acts in your interest and based on your defined investment objectives. Thus, no permanent consultation or even initiative on your part is necessary to make portfolio adjustments, minimize risks and advance long-term asset building (read more).
In a few steps to investing with Ginmon
You answer 7 multiple-choice questions on topics such as risk affinity and personal life situation. We use this to determine your type of investor.
Select your desired one-time deposit and savings rate using a slider. Our algorithm calculates your optimal portfolio from this.
After the depot opening, our algorithm automatically implements the investment strategy. You can view the current status online at any time.
What type of investor are you? Find out today.
FAQs / Frequently Asked Questions
How secure are robo advisors?
As the owner of your own securities deposit, only you have access to your assets. Robo advisors do not have legal or technical access to your assets at any time. As your securities are special funds, they are always fully protected, even in the case of insolvency.
At Ginmon, your investment is safe in your own securities deposit with our partner bank, DAB BNP Paribas. Legally, the assets of our clients are thus secured in the special assets of the custodian bank. Your money would also remain unaffected by the insolvency of our partner bank(read more).
In addition, we prefer fully replicating ETFs and index funds to avoid potential counterparty risks. Only in the case of raw materials we have to resort to synthetic products, as physical replication is not possible here.
When selecting our investment building blocks, we also pay close attention to whether the fund lends securities. To avoid default risks, we prefer funds with low securities lending. Furthermore, collateralisation of over 100% of the securities lent is mandatory for us.
In addition, your balance in the clearing account of DAB Bank as a German credit institution is subject to the EU Deposit Guarantee. So you don’t have to worry about the security of your investment.
The protection in the handling of customer data is of the utmost importance for Ginmon. Ginmon is subject to the applicable legal provisions of the Federal Data Protection Act (BDSG), the data protection regulations of the European Union and other data protection regulations.
In order to guarantee secure data transmission, we rely on state-of-the-art encryption methods when using our technology platform. Using 256-bit SSL encryption (Secure Socket Layer), you transmit your data to our servers via the Internet and vice versa. This encryption meets the same high standards that are common in banks. In the status bar of your browser, you can see this by the closed lock icon and the address bar starting with https://.
Why do robo advisors mostly invest in ETFs?
Exchange-traded funds(ETFs) are funds with a low annual cost burden due to the renunciation of a fund manager. Compared to traditional mutual funds with an active fund manager, ETFs and other index funds are significantly better suited for long-term wealth building due to low costs and high profitability due to the accurate mapping of market returns.
How do robo advisors behave during turbulent market periods?
In this point the various robo advisors differ significantly from each other. Some robo advisors actively react to market developments, while others rely on rebalancing or portfolio reallocations. At Ginmon, depots are adjusted anticyclical, which means that our algorithm performs rule-based rebalancing on our customers. This approach has been shown not only to reduce the risk of the portfolio, but also to generate additional returns.
What kind of robo advisor is better, active or passive?
This question cannot be answered in general, as you have to decide for yourself which type of robo advisor is best for you.
Active robo advisors proactively redeploy portfolios based on the estimated market development in order to benefit from predicted price developments. The problem with this investment strategy is that it attempts to predict the market, which is unfortunately simply not possible.
In the case of passive robo advisors, on the other hand, the portfolios are either not adjusted at all (buy and hold) during the investment, or only the weighting of individual asset classes is adjusted according to price developments in order to restore the original target allocation (rebalancing). The basic strategic consideration of passive robo advisors is to minimize transaction costs and thereby keep costs for customers low. Ginmon has therefore deliberately chosen to use a passive investment strategy.
Are robo advisors better than analog asset managers?
This question cannot be answered in general, as you have to decide for yourself which type of asset management is best for you.
The problem that arises from analogous wealth management is that this method attempts to predict the market in order to benefit from the predicted price developments. Unfortunately, it is simply not possible to predict the market, which is why decisions by analogous wealth managers are often based on subjective opinions and feelings.
Many people expect analog welath management to provide personal advice and support, fearing that robo advisors are only based on algorithms and mechanisms, not real people. In fact, it is by no means the case that you cannot seek personal advice from a robo advisor or that you cannot contact anyone in case of problems. At Ginmon, for example, we are always at your disposal for questions and comments and you can contact us in a variety of ways, which are listed again below.
Do I need previous knowledge to invest in a robo advisor?
You do not need any prior knowledge to invest with a robo advisor. Your investor type and your investment strategy can be determined automatically via a short interview. If you already have previous knowledge, it is also possible to select your investment strategy directly without conducting the interview. Your portfolio is then fully automated and transparently managed by the robo avisor.
How quickly can I dispose of my money?
You have access to your invested money at any time. In just a few steps, you can cancel your deposit with a robo advisor. With the termination submitted, your investment strategy will liquidate and your money will be transferred back to your reference account.
Do I get personal advice from a robo advisor?
Can't I just implement the investment proposal myself?
In theory, of course, it would also be a way to take control of your wealth management on your own. To do this, however, you would have to calculate the correct weighting of your deposit in order to be able to buy securities. However, maintaining balance, i.e. rebalancing or risk management, is probably the greater challenge.
Furthermore, the daily and active observation of the markets is not only complicated and time-consuming, but also associated with a lot of stress. Who wants to spend their time staring at charts and looking for buying opportunities? As a result, most retail investors are more likely to buy by feeling rather than relying on their own fundamental analyses, which, as we have already seen, usually has negative consequences.
If you can still imagine mastering these tasks and maybe even having fun with them, you can also take control of your wealth management on your own.
However, if this is not the case, the independent and manual compilation of a portfolio is unfortunately about as much fun as the annual tax return.
How will robo advisors develop in the future?
However, the form in which this happens varies significantly from one robo advisor to another.
At Ginmon, for example, new functions are constantly being worked on to make your investment even more efficient. Our technology and algorithm apeiron® is also constantly being developed and expanded so that you are always optimally invested.
Digital and individual. We are here for you and will be happy to help you.
Schedule a callback
Schedule a convenient callback and we will get back to you at the agreed time. This in no way means that you have to wait long for a phone call. We also offer you short-term time slots on the same day.
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By email you can reach us as usual and tell us your questions and wishes. We will contact you as soon as possible.