Passive Portfolios: A Game-Changer for Gig Workers and Bootstrappers
When we talk about “robo advisory,” we are not just talking about the use of technology for automatic investment decisions but also the allied benefits of plugging in technology. These benefits range from ultra-low-cost portfolio management to autopilot target-oriented funds such as target date funds (TDFs). This digital transformation is happening in the larger financial services industries, including insurance, to ease credit risks in a tumultuous economic environment and expand investments from the retail sector with comprehensive wealth advisory.
As forecasted by GlobeNewswire, the robo-advisory (RA) market is poised to be dominated by the affluent HNI sub-segment in the upcoming years. It is the most accessible segment to tap, so the popularity of RA will snowball from this segment, making up 39.9% of the $59.3 billion in RA revenues by 2028. But the real potential of the RA market will be realized by capturing the interests of retail investors, who have historically found it difficult to save money, grow their meagre investments, and prepare for retirement.
The modern economic strata comprise a large population of gig economy workers and upstart promoters at the pyramid’s base, constantly looking for favorable investment options with an uptick in disposable income. RA, with its benefits of low management fees and automation, is adequately positioned to uplift this economic stratum by effectively earning healthy returns for their wealthy future.
Enabling simple access investing
RAs perform an entry survey with their clients that helps them assess their risk appetite and goals. The robo-adviser then analyzes the client’s portfolio using machine learning algorithms and other data sources to determine if they’re a good fit for its service offering. To adequately assist the 1099 workers aka individual contractors (ICs), the volatility trends in their income are assessed, and a tailored strategy is advised. RAs are also equipped to provide financial literacy through various online courses to educate ICs on prudent wealth management decisions.
Robo advisory, therefore, enables easy access to financial products through AI investing apps that match the client’s risk tolerance and offers the needed digital investment sophistication. The UI of such automated digital investment platforms is intuitive enough to be easily used by the increasingly tech-savvy and the general populace alike, provided the latter isn’t skeptical of the technological intervention.
Tending to the needs of the adventurous workers
Not everyone is aligned to work 9-5 jobs in lieu of the job security, contributory benefits, and stability that define corporate jobs. Gig workers value experience and freedom much more than others. Such adventurous workers are not bound by the norm, as they do what gives them the utmost satisfaction. They’re not as money-minded as the typical workforce, but that’s not to say that they don’t deserve the allied benefits of earning a living.
As we become more technologically advanced, robo-advisory platforms have gained traction in the increasingly digitalized financial services industry to aid the free birds. The benefits of robo advisors are that they help save habitually and automatically deduct pre-tax income from an individual’s account periodically, giving rise to PAYE (pay-as-you-earn). This can help save tax for the seasonally employed and, in addition, support their financial goals through inflation-beating market returns. RAs are also capable of optimizing an investor’s tax liability through tax loss harvesting and redirecting the salvaged value into secure investments.
Automating investments for a custom portfolio
Investments can be automated either through a hybrid format such as AIP or a pure robo advisory.
- An individualized automatic investment plan (AIP) is an account managed by an investment account manager (e.g., a mutual fund) on behalf of the investor that makes financial decisions to achieve long-term goals. The entity typically charges fees based on how much money it manages. Typically, this fee is lower than what you would pay if you managed your investments directly.
- On the contrary, a fully automated RA could do much more than a simple AIP. For example, it can rebalance the portfolio based on changes in index composition or variance in stock returns, subject to turnover ratio. They can also suggest alternative investments that match the digital investor’s risk profile and goals as defined by the individual during the entry survey. Conversely, the advisory can also be recalibrated with a subsequent change in risk portfolio. This phenomenon can be observed in the glide path of TDFs as an investor ages. The best part is they don’t bother you with it, saving lots of time, which literally translates to money for entrepreneurs.
The choice of the type of robo advisory is dependent on the investor’s preferences. It has been observed that pure robo-advisory is bound to appeal to the younger generation of investors, as they trust technology for a set-and-forget investment strategy. Digital investors can derive satisfaction from knowing that their investments are rule-based rather than arbitrary.
The flexibility of RA-powered passive portfolio management
Robo advisory algorithms are based on Modern Portfolio Theory (MPT) and efficiently manage the risk-return trade-off for risk-averse investors such as ICs. Digital investing with RAs tends to make safe investments by replicating index funds, making them less risky than investing directly in individual stocks or bonds. The algorithms efficiently factor in macroeconomic conditions and global statistics to make the right decisions.
Robo-advisors offer improved returns over time since they can continue reinvesting any dividends earned as and when they become available instead of having a one size fits all approach. The compounding effect of dividend reinvestment is highly rewarding.
The need for robo in the financial services industry is justified. It can provide a cost-effective solution for small-ticket investors without the time or money to indulge themselves in actively managed investments.
Robo advisors offer plug-and-play solutions for investors seeking low minimum balance requirements because they don’t have enough capital to put aside regularly. As such, digital investing through robo is opportune for gig workers who can substitute their variable or seasonal incomes with majorly consistent indexed returns.
In addition, this will also attract millennial and Gen Z clients, who are still learning to invest their money wisely. They can use their technical soundness to develop a steady savings stream for a secured future. This is especially important for freelancers as well as entrepreneurs who do not have the safety net of employer-sponsored social insurance benefits.
RAs need to be seen as a complimentary tool
It is important to understand that robo-advisors are not replacing traditional investment advisors. Instead, they are providing low-cost access for niche investors, amid the growing popularity of the gig economy, to democratize investing to suit their purposes. Read more about this here.
RAs are on a tangent to underscore the high barriers of the financial industry in a bid to serve the historically underserved. There are still many untapped ways the same can be achieved to reduce the economic disparity in society and close the inequality gap for the adventurous workers in our society.
