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People in the UAE are starting to talk about robo advisors as an alternative to traditional financial advisors. But what are robo advisors? And how have they gained such popularity?

What exactly is a robo advisor?

A robo advisor is an online financial advisor that uses cutting edge software to help people manage their money and investments. The clue’s in the name – it’s a cross between a robot and a professional investment advisor. It enables investors to enjoy many of the benefits of having an advisor without being lumbered with the high fees they charge.

How do robo advisors work in practice?

There are 3 basic stages to the process by which robo advisors manage your money:

  1. Like a traditional financial advisor, robo advisors help you to decide how and when to invest. They do this by asking you questions so that they can learn your financial goals and risk appetite.  
  2. Once the robo advisor has a solid grasp of your requirements, it uses technology to algorithmically allocate your money into the right investments for you.
  3. The robo advisor then manages your investments over time, dynamically adjusting them as your financial objectives evolve and the underlying market conditions change. To do this, they use established techniques like Dollar Cost Averaging and rebalancing.

What makes robo advisors so special?

When investing, it’s important to consider the fees that people charge to manage your money. They might seem small, but over time they can erode your returns and inhibit your ability to generate wealth. For example, a traditional financial advisor who charges a 1% fee for constructing a £100,000 portfolio will collect £1,000 every year, regardless of how your investments perform. They might also invest your money into expensive mutual funds or even buy stocks directly, further eroding your returns. 

The great thing about robo advisors is that they make good quality investment advice affordable. They charge less in fees than professional investment advisors – as much as 1% less. This is because they employ scalable technologies to reduce the high overheads associated with traditional investment management (think expensive offices, business class flights and long lunches), and they tend to invest in ETFs, which are a very cost-efficient way of accessing markets for investors. As an added bonus, robo advisors are often able to negotiate lower management fees with ETF providers due to the scale of their activities.

Robo advisors are a far more convenient option than traditional wealth managers. They enable people to invest and monitor their investments in real-time without having to make phone calls or attend face-to-face meetings. In a world where we all seem to be “crazy busy”, this is a win. 

But the coolest thing about robo advisors is that they open investing up to a completely new audience. This is because they rarely demand a minimum account balance. So, people can invest at a younger age, benefiting from the magic of compound interest as their wealth grows over the long term.

The future of robo advisors

 Robo advisors are taking over the world. In fact, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) recently published a regulatory framework for robo advisors

As Dubai’s preeminent robo-advisor, Sarwa welcomes this move. It’s an important step forward in raising awareness about robo advisors in the Middle East and helping to ensure that investors get a high quality, regulated service that enables them to achieve their financial goals, without paying a fortune in fees to traditional financial advisors.

Slowly but surely, the old order is changing. Robo advisors are gaining traction amongst a new generation of savvy investors who believe in lower fees without compromising on quality of investment advice. And here at Sarwa, we’re proud to be a part of that.

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Important Disclosure:

The information provided in this blog is for general informational purposes only. It should not be considered as a personalized investment advice as this might not be suitable for everyone. Each investor should do their due diligence before making any decision that may impact his/her financial situation and should have an investment strategy that reflects his risk profile and goals. All investing is subject to risk, including the possible loss of the money invested. Examples provided are for illustrative purposes. Past performance does not guarantee future results. Data shared from third parties is obtained from what are considered reliable sources however cannot be guaranteed.