Online broker vs robo-advisor: FINQ's AI investing advantage

Online broker vs robo advisor: Introduction to digital investing

Over the past few decades, the digital revolution has empowered retail investors like never before. The average person with access to the internet can review their portfolio from the comfort of their home and even buy and sell stocks or obtain professional advice. 

When investors envision digital investing, two options are likely to come to mind:

• online brokers
• robo-advisors

Online brokers enable individuals to take significant control of their portfolio management, buying and selling investments at the time of their choosing. Of course, with this level of flexibility comes the responsibility to ensure sound trade decisions. 

This requires research and time, something most people are short on.

A more recent innovation has been the proliferation of robo-advisors, relatively hands-off investment management that performs trades on your behalf, typically based on your answers to a questionnaire about risk tolerance, risk appetite, and investment goals. 

While robo-advice can be an excellent solution for some people, it’s not without downsides, which we’ll explore below. 

As great as online brokers and robo-advisors have been, progress has stagnated. Over the past decade, we haven’t witnessed a substantial disruption to the digital retail investing space.

That is, until now.

Unless you’ve been sleeping under a rock the past year, you’ve likely heard the hype around artificial intelligence, popularized by the release of ChatGPT. No longer is the debate focused on online brokers vs. robo-advisors alone. Instead, platforms like FINQ’s AI-driven stock rankings are a new powerful alternative on the market. 

So, how does a platform like FINQ differ from online brokers and robo-advisors?

We’re glad you asked.

What is an online broker?

When we talk about the financial world and specifically the investment world we have to understand that the service named "brokerage" is at the very bottom of the value chain for the customer. For example, if a person has to travel a long way to have brain surgery, but the transportation to the expert Dr is at the bottom of the value chain. So the same way, digitizing brokerage is nice and important but does not really add much value. Believe it or not, online brokers have been around for over three decades. In fact, the first electronic trading platform hit the market in 1992. However, their popularity didn’t grow substantially until E-Trade launched their platform in 1999, aimed primarily at the consumer. 

At its simplest, an online broker is a platform that allows investors to buy and sell securities, like stocks, over the Internet. You can think of them as intermediaries between the market and individual investors. 

Typically, online brokerage platforms also provide financial data, analysis tools, and educational resources, helping investors make informed decisions.

Online broker advantages

• Lower cost: Compared to old-school brick-and-mortar brokerages, online brokers typically offer lower fees and commissions.
• Convenience: Investors can execute trades and monitor their portfolio from home or on vacation.
• Access to information: Many online brokers provide a wealth of resources, like real-time data and analytical tools.
• Diversity of investment options: Online brokers often offer a wide range of investment products, like stocks, bonds, ETFs, and options.

Online broker disadvantages

• Hands-off: Online brokers are typically hands-off platforms that offer little to no personalization or assistance for the investor.
• Overwhelming: The amount of data available in the market continues to proliferate. As a result, it becomes increasingly challenging for individual investors to parse this vast pool of information without becoming overwhelmed.
• Encourages impulsivity: With constant access to your portfolio, a tidal wave of market data, and 24/7 news updates online, it can be tempting to make impulsive trade decisions based on emotions rather than objective analysis.

What is a robo-advisor?

Robo-advisors are digital platforms that provide automated, rules-based investment management services. Usually, a platform will collect information about a client's financial situation and future goals using a simple questionnaire. Based on the responses, the robo-advisor will recommend a particular portfolio of investments and weights. Over time, as different assets deviate from their target weight, the platform will rebalance (trade) the account back to the target.

Robo-advisor advantages

• Cost-effectiveness: Compared to traditional human financial advisors, robo-advisors usually charge lower fees and require a lower minimum investment. They also automate the entire documentation steps resulting in the cost of commissions being cheaper.
• Accessibility: Clients can check their investments and request changes around the clock. However, unlike online brokers, longer delays may occur before changes are implemented.
• Simplicity and convenience: Robo-advisors often have simple user interfaces, making investing friendly and less intimidating for beginners.

Robo-advisor disadvantages

• Limited personalization: Robo-advisors do not typically account for the nuances of an individual’s changing financial situation or complex financial planning needs. Instead, they usually offer a small selection of fixed predetermined portfolios that users are inserted into. In other words, they are not customized like traditional human-managed portfolios.
• Over-simplification: Robo-advisors might oversimplify the investment process, overlooking intricate investment strategies and opportunities that could offer superior returns.
• Emotional disconnect: In an article published in Forbes last year, the lack of guidance with robo-advisory services was highlighted as one of its downfalls. During volatile market conditions, investors receive no guidance and can sometimes overreact.
• Does not analyze the market: Robo-advisor platforms rely on simple rules based on modern portfolio theory to allocate assets and manage portfolios. They do not assess markets in the traditional sense, meaning they do not attempt to predict market movements or time the market. As a result, they can miss lucrative opportunities and stay invested in undesirable stocks during market downturns.
• Biased: Robo-advisor algorithms are subject to bias from the humans who designed them. Typically, these are simple rules, like selling a stock if its weighting crosses a predefined threshold.

Recently, robo-advisors and online brokers have come under increased scrutiny from regulatory bodies like the Securities Exchange Commission (SEC). They’ve been accused of encouraging investors to trade too frequently using elaborate promotions, colorful graphics, and push notifications. 

This reckless trading can result in risky investments and higher trading costs.

“In the last few years, we’ve seen a proliferation of trading apps, wealth-management apps, and robo advisers that use these practices to develop and provide investment advice to retail investors… In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy,” said SEC Chairman Gary Gensler in 2021, according to the Wall Street Journal article written at the time. 

Online broker vs. robo-advisor: Key differences

The core differences between online brokers and robo-advisors lie in their operation, autonomy, complexity, and the personal investment styles they serve.

Online brokers act as access points to the financial markets, in turn, enabling investors to buy and sell assets like stocks, bonds, ETFs, and mutual funds. This approach is self-directed. It requires investors to perform their own research, analyze market trends, and make individual trading decisions.

In contrast, robo-advisors automate the portfolio management process. After you set your risk tolerance, time horizon, and investment goals, robo-advisors use algorithms to build and manage your portfolio. This hands-off approach means investors have less control over individual investment choices and cannot easily modify their portfolios.