Would you trust a robot to invest your money?

Published on 29th October, 2024 at 01:53 pm

That’s not a trick question! With advancements in AI, machine learning and algorithmic trading, they are already fully operational around the world and in South Africa; which begs the question: would you trust a robo-adviser to invest your money? We take a closer look at the pros and cons, and what you should keep in mind.

Reading time: 4 minutes

In this article, you will learn:

• The basics of robo-advisers and how they work
• The pros and cons of robo-investors
• How they compare with traditional bespoke investment solutions
• What the future holds

Understanding robo-advisers

Simply put, robo-advisers are automated, algorithm-based services you can access via your phone or a desktop that analyse the markets and trade with your money accordingly. In principle, they are by no means a new innovation, but recently, they have gained enormous traction globally, including in South Africa.

How they work and what’s out there

Robo-advisers build and manage portfolios based on your personal financial goals, the level of risk you want to take on, and the time frames you have in mind. In South Africa, platforms like eToro, OUTvest and robo-advisers from both Sygnia and FNB have made investing relatively affordable and accessible. On the other hand, you’ll also find many ‘DIY’ platforms and apps like Eightcap, IG Markets and EasyEquities which let you buy and manage shares on your own, typically at lower fees than traditional investment managers.

Pros of robo-advisers

• The cost factor: robo-advisers and DIY platforms sometimes charge lower fees than traditional advisers. In some cases, there may be no fees at all, meaning more of your money
• Accessibility: you don’t need fancy equipment or programmes, robo-advisers run through easily accessible platforms, often just from your phone, meaning anyone can participate in investing. Additionally, many allow you to invest from as little as just a few hundred Rands, and give you access to your portfolio at any time of the day or night.
• Quick and easy: robo-advisers can automate many actions in your portfolio, including fund allocation. This means that if you lack the expertise to manage these actions yourself, you can sit back and watch it happen automatically.

Cons of robo-advisers

• Core limitations: as powerful as the technology is, there are many limitations to robo-advisers, namely; they can’t give customised financial advice, they can seldom tailor offerings, and in the case of DIY platforms, they won’t stop you from making potentially serious errors or mistakes.
• No magic touch: sometimes analysing the market isn’t just about trends and numbers, but about subtle nuances and insights, which robo-advisers can’t really do. From socio-political developments to major world events, a robo-adviser can be more reactionary than proactive when it comes to nuances.

Which route would you take?

The pros and cons of robo-advisers speak for themselves: while they are easy and affordable, they carry substantial risks too. For that reason, it’s safe to say that traditional, bespoke investment services by real financial advisers and experts are more relevant than ever. Human advisers can offer tailored advice that take every aspect and nuance of your life into consideration, including debt management, taxes, estate and succession planning, and more. And while there are higher costs involved, you will have a level of financial confidence in your life that automated services can’t provide. And that’s priceless!

Trying your hand at investment

This is not to say that investing should be one or the other. Why not try investing small amounts with robo-advisers and DIY platforms (it can help you gain experience and stay up to date with technology), but align your decisions and long-term objectives with a trusted financial adviser for more complicated and nuanced transactions.