Robo-advisor vs. investment mandates: Which is better?

A new wave of robo-advisors and hybrid investing services (human expertise combined with the efficiency of digitally automated strategies) are changing the banking world. But with so many options to choose from, where should you place your trust and money?

If you’ve decided to start investing, you may have come across several robo-advisory and investment mandate services (you can learn more about the different types of mandates here). But accessibility can be a double-edged sword. Jumping into either without fully understanding their nuances could lead you to adopt a strategy that doesn’t suit your goals, needs or lifestyle. The next few minutes can help you discover the right approach for your investment journey.

Robo-advisors are automated investment platforms that use algorithms and technology to offer financial advice and manage investment portfolios. They simplify the investment process, and their comparatively low cost makes investing accessible to a broader audience. A robo-advisor can consider factors like your financial goals, risk tolerance, and time horizon to create and manage diversified portfolios of stocks, bonds, and other assets.

Accessibility: While most traditional private banks and wealth management services initially require a large minimum deposit from their clients, that’s not true for robo-advisors. They often have lower minimum investment requirements, allowing people with varying levels of wealth to access professionally managed investment strategies.

Affordability: Robo-advisors typically charge lower fees compared to traditional human wealth advisors.

Customisation: Many robo-advisors offer investment strategies that can be personalised to a certain degree based on individual financial goals and risk tolerance.

Continuous monitoring: As the markets change, a robo-advisor can monitor and rebalance portfolios to maintain the desired risk-return profile. This proactive approach ensures that investments align with your objectives.

No human interaction: Robo-advisors are automated and lack the deeper personalisation that traditional financial advisors can offer through expert consultations.

Limited financial planning: While robo-advisors excel at managing investments, they may not provide comprehensive financial planning services. For example, you might require additional assistance with a complex financial situation or estate planning needs.

Technology risks: As a service that relies greatly on technology, a robo-advisor may be vulnerable to technical glitches or cybersecurity breaches that could pose risks to investments and personal data.

It’s tempting to hear the term ‘investment mandate’ and think of it as another banking buzzword. However, overlook it at your own risk. An investment mandate offers a powerful approach to investing. It outlines the objectives, constraints, and guidelines for managing an investment portfolio. Think of it as a roadmap investment professionals follow to ensure your portfolio stays aligned with your goals and risk tolerance.

Objectives: This is the heart of the investment mandate. It defines the financial goals of the portfolio, like capital preservation, income generation, or capital growth.

Risk tolerance: We all have different capacities and comfort levels for risk. An investment mandate sets boundaries for the level of risk your portfolio can take on, accounting for risk tolerance factors like age, financial situation, and risk appetite.

Investment restrictions: Restrictions or guidelines on asset allocation and specific investment types are also a part of investment mandates. These restrictions can be based on regulatory requirements, ethical considerations, or your preferences. For example, a mandate might specify limits on investing in specific industries or regions.

Time horizon: How long should you stay invested? The answer to that question is your time horizon. It helps determine the appropriate investment strategy, as a longer time horizon may allow for a more aggressive approach.

Benchmark: Many mandates include a benchmark index or reference point against which the portfolio’s performance will be measured. This benchmark provides a basis for measuring the success of the investment strategy.

Alignment with goals: Investment mandates align the portfolio’s objectives with your financial goals and risk tolerance. This ensures a tailored investment strategy.

Clear guidelines: The rules and directions in a mandate reduce the risk of investment professionals making decisions that deviate from your goals.

Risk management: By specifying risk tolerance and restrictions, investment mandates help manage risk effectively and protect your capital.

Rigidity: When an investment mandate is inflexible, it can be hard to adapt to changing market conditions and limit the investment professional’s ability to capitalise on opportunities, like investing in potentially profitable assets or sectors.

Complexity: Drafting and managing an investment mandate can be complex and time-consuming. Adjusting a mandate to account for market dynamics and changing needs requires care and patience.

One of the biggest debates in finance is whether automated systems can replace human expertise in managing investments. Instead of trying to answer this big philosophical question, let’s compare robo-advisors and investment mandates more concretely.

Robo-advisors typically charge a straightforward fee, often a percentage of the assets under management (AUM). This fee structure is easy to understand, and you can calculate costs based on your portfolio size. However, the fees for a robo-advisor can still add up over time. Carefully consider the impact of these fees on your returns, especially if you’re keen on investing long-term. For more details on the fees and expenses you should consider for a robo-advisor, check out what Investopedia writes about the topic.

The fee structure for investment mandates can vary depending on your arrangements with your financial advisor or portfolio manager. In some cases, client fees include management fees and performance-based fees. Moreover, traditional human advisors may charge additional fees for financial planning and consultation services.

Choosing a less flexible investing approach could limit your financial growth. Regarding flexibility and customisation, investment mandates guided by human expertise tend to offer more options and a more tailored approach. Human advisors can provide in-depth consultations and adapt investment strategies over time to accommodate the unique needs and preferences of clients.

Robo-advisors offer a lower degree of customisation, often focussing on more standardised approaches centred around asset allocation and risk management.

Here’s a quick breakdown of their differences across different parameters:

Clearly, the decision between a robo-advisor and an investment mandate is more than one-size-fits-all. By now, you may have already found one or the other approach resonating strongly with your financial objectives and comfort level. It’s essential to consider these factors along with your financial circumstances and aspirations. Don’t forget:

• Your Financial Goals: Different people have different financial objectives. Consider the nuances of your own financial goals before choosing an approach. Picking the wrong investment tool could take you further away from your goals.
• Risk Tolerance: Everyone has their own comfort zone regarding financial risk. Ignoring your risk tolerance could result in uncomfortable financial situations or poor financial decisions.
• Time Commitment: Are you willing to spend the time to manage your investments yourself? To keep up with the market and adjust your portfolio with market changes? Consider this carefully before making a choice.