Digital Asset Managers

What Is It?

Digital asset managers are digital financial advisory platforms that use investor risk profiles and other relevant information to automatically build and manage investment portfolios using algorithms that take into account an investor’s risk tolerance, investment horizon, and financial position.

Clients of digital asset managers typically complete a survey outlining their financial position and goals. The service uses this information to determine the client’s optimal portfolio allocation and to offer investment advice.

Digital asset managers also typically perform portfolio rebalancing on a regular basis, adjusting your portfolio to bring it back in balance with your financial goals when necessary. If your financial circumstances change you can complete a new investor survey, which a digital asset manager can use to adjust your asset allocation based upon the changes.

How Is It Used?

Digital asset manager services rely on predetermined allocation formulas which take the human element out of asset allocation choices. This can serve as a protection against investors’ tendency to make emotional investment decisions which can hurt their performance, such as investing an excessive portion of their investments in a “hot” sector of the market just before that sector experiences a significant decline.

At SmartWealth, we use Modern Portfolio Theory (MPT), the asset allocation model designed by Nobel Prize-winning economist Harry Markowitz to minimize volatility (risk) and maximize return (reward) via diversification, and other relevant models to allocate your assets based on your personal financial situation and goals. We use exchange-traded funds to allocate your investments across hundreds of stocks and bonds to ensure that your accounts are fully diversified.

Key benefits of digital asset managers include:

  • Low management fees as a percentage of funds invested
  • Around the clock (24/7) digital access to your account
  • Access to global markets in the context of a diversified portfolio
  • Automated dividend reinvestment plan
  • Low initial investment requirements
  • Automated portfolio rebalancing
  • Creation of your portfolio is tailored to fit your investor profile
  • Use of ETFs avoids the subjectivity involved in selecting individual stocks

Digital asset managers offer investors access to professional asset allocation without requiring the high minimum initial investment amount investment managers often require before taking on a new client. Thus, these services offer investors the opportunity to receive professional investment management services even with a relatively small initial investment.

These services also add efficiency to the financial planning and management process. When using a digital asset manager, you can receive financial advice and implement an investment strategy from the comfort of your own home. There is no need to meet a financial advisor or talk to one of the phone to design an investment plan or make a trade.

Other Considerations

Using a digital asset manager requires a certain amount of familiarity with technology. Investors who aren’t used to the process of investing online may have a steeper learning curve than those who are more familiar with handling financial matters in this manner. Investors who aren’t familiar with the process of determining financial goals also may face a learning curve when completing investor surveys that require them to indicate their financial situation and preferences.

Also, as these services use models based on past performance to determine portfolio asset allocation, if future financial conditions differ greatly from the past such an approach may not accurately model future market performance.