How to choose between robo-advisors and All-in-One ETFs?

What are robo-advisors?

Many people have historically relied on human financial advisors to assist with customer service, bank account servicing, goal setting, financial education, and portfolio management when considering personal finance issues. In the modern era, financial advisors no longer need to be human.

Robo-advisors are digital platforms that, through algorithms and automation, can provide financial advisory services to people without the reliance on human supervision. You have probably encountered these robo-advisors when filling out online questionnaires relating to your financial circumstances and personal risk tolerance.

Robo-advisors rely on historical data to inform its advice and therefore based on the answers to the questionnaire, can provide optimal advice and suggestions.

Robo-advisors can take control of a portfolio's asset allocation if given the authority to do so. The robo-advisor only needs to be given parameters and other special considerations, and with that information, can construct a portfolio. For example, an investor may limit their allocation strategy to a maximum of 50% invested in equities. However, within that parameter, the robo-advisor can allocate the portfolio as it sees fit. 

What are All-in-One ETFs?

An All-in-One ETF or Multi-Asset Class ETF is an instrument that allows an investor to invest in multiple asset classes through a single ETF. With this instrument, investors can gain the diversification benefits of investing in multiple asset classes. Furthermore, All-in-One ETFs remove the complications and trading costs of investing in the individual asset classes.

All-in-One ETFs are generally managed and rebalanced by a portfolio manager. Multi-Asset Class ETFs may employ an active strategy of rebalancing based on market expectations, while some may adopt a more passive buy-and-hold strategy. The ETF strategy will influence the management expense ratio, with more active management requiring greater oversight and consequently higher fees.

All-in-One ETFs simplify the investing process, allowing investors to gain diversification and reduce investment risk, hassle, and costs. If an All-in-One ETF is not used, investors need to seek out individual securities and gain exposure to the separate asset classes individually. This is a complex process for those unfamiliar with asset allocation strategies.

With an All-in-One ETF, an investor needs to simply identify an ETF that uses a strategy that aligns with what the investor is looking for. They only need to purchase one type of security to gain the asset allocation exposure they would like. 

Benefits and drawbacks of robo-advisors vs. All-in-One ETFs

Both robo-advisors and All-in-One ETFs are more efficient methods of constructing a portfolio for those unfamiliar with the process. However, there are some differences in the benefits and drawbacks of each. 

Benefits of robo-advisors are:

• Low-cost alternative to traditional advisors
• More accessible, e.g. available 24/7 via the internet
• Efficiency 

Drawbacks of robo-advisors are:

• No human element, and therefore issues can arise relating to service
• Authority over decisions and exposures is removed

Benefits of All-in-One ETFs are:

• A low-cost way of achieving a high level of diversification
• Relatively lower fees than other actively managed mutual funds
• Automatic rebalancing

Drawbacks of All-in-One ETFs are:

• “One-size-fits-all” approach, minimal customization for individual investors’ requirements and constraints
• Subject to market risk factors like any individual security, for example, liquidity in sparsely traded ETFs can increase trading costs 

The main differences are that a robo-advisor is automated and must be given direction from the investor. In contrast, All-in-One ETFs are professionally managed and adhere to a strategy that investors do not influence. 

Some individuals are less trusting of algorithms and may prefer a human portfolio manager. In this case, an All-in-One ETF may be a more suitable alternative.

On the other hand, some individuals would want a more tailored strategy that is not available through an ETF; therefore, a robo-advisor may be a more suitable alternative.