Assuming you haven’t been living under a rock, you’ve almost certainly heard something about robo-advisers. Millennials seem to love them. Some believe they are poised to take over the investment management industry entirely.

But what exactly are robo-advisers?

Robo-advisers represent a product, but they also represent an idea. On the product front, a robo-adviser is simply software that executes an investment program. This concept has been around for many years: Have you ever heard of a life cycle fund? Robos just make this concept more user-friendly and accessible.

As an idea, robo-advisers represent a revolution for investors: Traditional financial advice can be too complex and too opaque. However, financial advice could be much simpler and more transparent. Robos directly facilitate this revolution. With this new simplicity and transparency comes lower costs and thus, better expected performance.

Advantages for the Small Investor

While reducing costs is an important attribute of robo-advisers and represents a real source of value to investors, robos offer numerous additional advantages over traditional asset management approaches. Robos democratize asset management by providing small investors access to high-quality financial advice.

Robos Leverage Technology

Historically, managing a portfolio has entailed a lot of labor, so traditional advisers have not been able to work with the smallest clients. In our business at Alpha Architect, for example, if we accepted every small request for customized portfolio management services, we would quickly go out of business. This is why we maintain a $1 million minimum for separately managed accounts. Without size, we cannot accomplish our goal of delivering affordable active management.

But technology changes the game. By leveraging technology, and simplifying the menu of services, robos can take advantage of modern portfolio theory and the latest academic research to offer world-class asset management for a fraction of the cost that advisers have typically charged. And they can do it with very low account minimums. In a world where questionable ad hoc solutions are the rule and not the exception, robos represent a departure from the old-fashioned approach that benefits the investor.

Robos Systematize Discipline

One of the hardest parts of investing is adhering to an investment plan. When markets gyrate, skittish investors allow their emotions to take over, which sometimes results in poor decision-making.

Since they are automated, robo-advisers can save investors from the effects of their own emotions. Robos never panic, but are dispassionate and always maintain discipline.

Additionally, robos are never on vacation, preoccupied or too busy to pay attention to the portfolio. When it’s time to rebalance, the robos reliably review the situation and make the appropriate adjustments.

Robos Save Time

Another important advantage of robos is that they save time for investors. Instead of spending hours every month studying a portfolio, preparing a list of trades, and executing those trades, investors simply rely on a robo-adviser to do it for them, and at a low cost.

This frees up time that would otherwise be spent managing a portfolio. For a smaller investor, this might mean more time for kids, socializing or leisure activities like golf. For many, this represents a good trade-off.

Robos Eliminate Pushy Salesmen

Perhaps best of all, robos have no sales agenda. You can say goodbye to your suit-wearing adviser trying to upsell you into overpriced products.

Types of Robo Services

There are a variety of robo solutions available in the market today. Two of the most recognizable names in the robo market today are Wealthfront and Betterment. These services offer diversified passive global portfolios across asset classes and use exchange-traded funds (ETFs) to keep costs low.

Most robo services offer passive investment solutions. As an alternative, at Alpha Architect we created a robo-adviser that leverages our research and development to offer an active robo service. We focus on value stocks and momentum stocks and apply our downside protection model, which leverages trend-following rules to try to avoid large market drawdowns.

Conclusion

There are many reasons why robo-advisers might be a good solution for individuals who are traditionally ardent do-it-yourself investors. These solutions leverage technology, enforce discipline, save time, have no pushy salesmen, and there are increasingly more and more alternatives from which to choose.

The passive solutions are great, and I’m sure there will be more active offerings in the future. Forward-looking investors should at least consider a robo-adviser to help them achieve their investment objectives.

This article is an edited version of a longer piece by Wesley Gray, originally posted here at the Alpha Architect website.