Robo-Advisor, AI-Advisor and Hybrid-Advisors Explained (2024)

A robo-advisor is a fully automated investing service; a hybrid advisor adds the human touch to investing, and the AI robo-advisor uses algorithms and machine learning to make investments on your behalf.

Robo-advisors are automated investment services that use computer algorithms to invest users’ money. They require little to no human interaction, and an automated portfolio rebalancing feature typically exists.

Hybrid advisors combine the best of both worlds – robo-investment advice and traditional advice from human financial advisors. With a hybrid advisor, users can get a tailored portfolio created from a combination of investments and exchange-traded funds (ETFs).

On the other hand, AI advisors utilize artificial intelligence to make decisions on which investments to make. AI advisors take into account individual goals, financial objectives, and risk factors while also monitoring external factors such as market fluctuations and economic indicators when making decisions about what investments to make.

This allows investors to have more control over their portfolios with less effort while benefiting from an AI advisor’s expertise.

What Is A Robo-Advisor?

A robo-advisor is an automated online investment advisor that provides portfolio management services with minimal human interaction. It uses algorithms to analyze your financial situation, investments, and objectives and then builds a custom portfolio tailored to meet your needs. Robo-advisors provide diversified portfolios of low-cost exchange-traded funds (ETFs), index funds, and individual stocks, with services that are more affordable and accessible than traditional financial advisors.

They can also provide access to financial advice, tax-loss harvesting, rebalancing, and other services unavailable from a typical broker. Robo-advisors typically require no minimum balance. This makes them an attractive option for beginner investors without the funds or expertise to manage their portfolios successfully.

However, “robo” and “bot” are financial-industry slang terms for digital financial applications. For example, trading robots or trade bots handle most trades on the world’s financial markets.

Interestingly, news reports indicate many financial industry professionals hate the terms “robo” and “bot.” However, those words are the standard industry technology for digital advisors.

The idea behind robo-advisors is that software is more accurate, honest, and less biased than human advisors. For instance, a robo-advisor is not likely to receive a commission or kickback on equities or securities it sells.

In addition, promoters claim that robo-advisors are less likely to make mistakes than people. Notably, algorithms are better at math than most humans.

Lastly, robo-advisors will not suffer from the emotional decision-making that most investors and traders try to battle against.

The History of Robo-Advisors

The first known robo-advisor was a semi-automated financial manager offered by Mint in 2006. More sophisticated robo-advisors appeared during the Great Financial Meltdown in 2008. Robo-advisors’appearance resulted from the popular distrust of human financial advisors and investment bankers.

In 2010, John Stein launched Betterment, the first robo-advisor marketed to the general public. Over the next few years, traditional asset managers like Vanguard, Morgan Stanley, Charles Schwab, and JPMorgan Chase entered the robo-advisor market.

By 2017, robo-advisors were managing $200 billion in assets, Barrons estimates. Vanguard’s Personal Advisor Services was the largest robo-advisor, overseeing $101 billion in assets. Schwab is the second-largest robo-advisor, managing $27 billion in assets. Also, government agencies like the Nevada State Treasurer are turning to robo-advisors to manage public investments.

Moreover, some regulatory agencies, like the Monetary Authority of Singapore, are issuing licenses to Robot Advisors. The US Securities and Exchange Commission (SEC) grants them the same legal status as human financial advisors.

The amount of funds controlled by robo-advisors is growing dramatically worldwide; they could manage over $13 trillion in assets by 2025.

What Is An AI Robo-Advisor?

New, more sophisticated robo-advisors that utilize artificial intelligence (AI) and machine learning to analyze investments are entering the market. Interestingly, some of these robo-advisors will do far more than offer financial advice. Moreover, many new robo-advisors are also smartphone apps.

For example, Numerai is trying to build an artificial intelligence hedge fund linked to a cryptocurrency called Numeraire. Meanwhile, creators envision an app called Daneel as a combination of robo-advisor and personal assistant you can access through your phone.

Other mobile robot advisors include Japan’s Theo and Bamboo. Besides, companies like Infinity Partners are developing robot wealth managers for rich clients.

Will Artificial Intelligence (AI) Advisors Replace Robo-Advisors?

Investment banks are working with artificial intelligence because robo-advisors have been a hard sell to affluent clients. Reuters reports that UBS sold its SmartWealth British robot advisor to SigFig in 2018. The Swiss bank sold SmartWealth because it was not making money.

Entrepreneurs like those behind Numerai hope to succeed where UBS failed by building AI advisors that can do everything human investment bankers and fund managers can. Companies like Numerai aim to create an AI that manages money without human help. However, today’s AI advisors are far from achieving that goal. On the other hand, many organizations are trying to build AI advisors that “think” for themselves.

What Types Of Robo-advisors Are There?

Today, there are many robo-advisors on the market. The most popular robo-advisors are simple investment apps like Vanguard’s Personal Advisor Services.

In detail, these simple investment apps manage accounts and make trades under specific conditions. For instance, an investment app could sell a stock if its price-earnings ratio (PE Ratio) is too high.

Automatic investment apps like M1 and Robin Hood offer instant, low-cost access to investment markets. For instance, M1 allows users to pick stocks or ETFs or access 80 managed portfolios.

Meanwhile, artificial intelligence-powered apps, like Numerai and Sharpe Capital, use cutting-edge mechanisms like machine learning and prediction markets to make complex decisions. For instance, Numerai will try to predict market outcomes and bet against the markets.

In addition, next-generation robo-advisors are controlling hedge funds, mutual funds, and even bank accounts. Hence, robo-advisors could soon manage your money and offer financial advice.

What Is A Hybrid Robo-Advisor?

A hybrid robo-advisor combines a digital algorithm with a human investment advisor. The idea is to add a human touch to robo-investing. The hybrid robo-advisors exist because many customers will feel better if there is a person to talk to. Also, some people are uncomfortable with machines managing their finances.

Specifically, the average robo-advisor combines a standard package of algorithms with a person. The robot advisor will handle most of the investment chores. However, customers can talk to a human whenever they want to.

An obvious use for hybrids is to get people comfortable with robo-advisors. Asset managers often use hybrid advisors to deal with older customers and people who know little about finance.

How Do Hybrid Robo-Advisors Work?

Interestingly, hybrid financial advisors are becoming popular. An Accenture survey estimates 68% of affluent investors prefer hybrid advisors, Investment News reports. Moreover, hybrid advisors could manage 40% of the investment wealth in the United States by 2025.

A human financial advisor could recommend robo-advisors or algorithms to customers. The human advisor could also interview a customer and decide which robo-advisor is right for her.

Under those circ*mstances, hybrid advisors could be the future of wealth management in the United States. An obvious advantage to hybrids is that they will enable human financial advisors to keep their jobs.

On the other hand, some investors could be more comfortable with robo-advisor than human financial advisors. Many people distrust financial advisors because they view them as salespeople.

Moreover, younger people who grew up playing video games, surfing the internet, and using apps could prefer robo-advisor. In particular, people under 35 could view a robo-advisor as another useful app rather than a threat.

Hybrid Advisors vs. Robo-Advisors

Some wealth management firms like Wealthfront refuse to use human financial professionals. Instead, Wealthfront uses algorithms and bots for everything. For example, Wealthfront advertises Automated Financial Management.

However, traditional investment firms like Morgan Stanley and mutual fund managers like Vanguard prefer hybrid advisors. Such organizations use hybrids because they work with customers of all ages and backgrounds.

Notably, those unfamiliar with the financial markets and investing are less trusting of innovations like robo-advisors. However, robo-advisors are more efficient and work better with large numbers of customers.

Strangely, robo-advisor can provide a higher level of customer service. For instance, a robo-advisor can instantly respond to phone calls and emails and operate 24 hours a day, seven days a week. Besides, a robo-advisor can instantly fulfill simple requests such as selling or buying equities or providing a balance.

Finally, smartphones and the internet can provide instant connectivity to robo-advisor. Thus, robo-advisor are perfect for people who want constant control over their investments.

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List of Robo-Advisors – Advantages, Disadvantages & Fees

Table 1. List of Robo Advisors 2019 - Advantages, Disadvantages & Fees

Note: There are other robo-advisors out there, and more companies are coming online daily, so it is always a good idea to shop around.

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Learn More About Robo Advisors With Our 12 Part Q&A Series

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