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When the computer advises on finances… robo-advisors and their functionality

The classic way looks like this: Individual A has accumulated assets and wants them not just to be stashed away somewhere, but to grow by themselves in the best case scenario. However, since private individual A has little prior knowledge of the investment and financial sector, she consults an investment advisor who presents her with an investment plan. The next step is to decide whether to follow this plan or discard it. The digital counterpart to this variant is called a robo-advisor.

How does the digital wealth advisor work

Which variants there are of this technical application, has the editorship of OnlineBanken.com in a Robo Advisor comparison clearly represented. What else there is to know about the digital investment advisor and whether it comes close to the investment advisor as a person, reveals the following article.

How a robo-advisor works

A robo-advisor is programmed to minimize risk and optimize profit margin

The robo-advisor takes the money to be invested and allocates it – automatically – to different investment strategies. In this way, a machine takes over what an investment advisor learned during his or her training. However, instead of providing investment advice in conversational form, as described at BaFin.de, the distribution of the investment assets follows a special programming, as it were.

The robo-advisor knows a lot about investment options and their risks, but nothing about the person who wants to invest his or her assets. However, this is important in order to select the investment strategy that also suits the individual’s perception of risk. Figuratively speaking, this means: If you like love stories, you would probably not feel comfortable watching horror movies at movie night; fans of bloodthirsty action and monsters gone wild on the big screen, on the other hand, are happy to let themselves in for the horror movie adventure.

How does a robo-advisor work

To ensure that investment does not become the script for a horror movie, the robo-advisor must be fed information about popular investment options and the investor’s risk tolerance. This information is collected with the help of a standardized questionnaire. The answers – in the form of multiple-choice checkboxes – can be understood and implemented by the computer. Of course, the robo-advisor cannot become active independently and without the go-ahead of the willing investor. This also means that only after the approval of the investment management in theory the actual investment takes place – with deposit opening, the search for suitable equity funds as well as the actual investment of assets.

Attention: Not all robo-advisors work the same way!

Not all robo-advisors work the same


A robo-advisor is only as good as its programming. That is why it is so important to use the robo-advisor comparison mentioned at the beginning of this article to check which form of programming is the right choice. The broad features of robo-advisors are always the same: they deliver standardized, technology-based financial advice as well as investment and financial brokerage, and provide digital asset management. The technology behind a robo-advisor follows the principle of minimizing risk and increasing profits.

Basically, a distinction is made between active and passive robo-advisors:

  • The active robo-advisor is – as the name predicts – the active part. This means that it is tasked with reallocating investments on its own. Since a robo-advisor is still not a human being, but programming, the assets are virtually restructured with software. The advantage of this variant is that it is possible to react to market fluctuations at short notice. This improves the chances of return.
  • The passive Robo-Advisor intervenes hardly or not at all. It levels out any price fluctuations by ensuring that the portfolio is broadly diversified. Returns and profits increase when the selected investment products flourish on the market. The originally selected investment is only adjusted to keep the risk defined at the outset at the agreed level. If the robo-advisor turns the adjusting screws, it is only to keep the investment in balance.

The service portfolio also differentiates the various robo-advisors.

Basically distinguish between active and passive robo-advisors

As has already been documented, the basic principle of a robo-advisor is always the same. It is programmed to minimize risk and optimize profit margin. Only the level of service varies from provider to provider. And this service, which reaches the bottom line of the willing investor, has something to do with the underlying laws.

1) A robo-advisor with an “intermediary license” needs a partner bank, since it can only offer a standardized portfolio itself. This form of robo-advisor is well suited as an implementation tool for all those who have expertise in the investment field themselves. This is because the adjustments in the investment must then be made themselves. The law, after which the mediator acts, is the paragraph 34 f of the trade regulations , which can be read under Gesetze-im-Internet.de.

2) A robo-advisor that has a special permit from BaFin is not only allowed to broker standards, but also analyzes the wishes of the investment-happy customers and independently makes decisions that fit the customer’s specifications. His way of working or what he is allowed to do and what he is not allowed to do is written down in paragraph 32 of the German Banking Act. The details can be found in a fact sheet published by the Deutsche Bundesbank at BaFin.de.


By the way, no one who wants to use a Robo-Advisor needs to read the law. Nor do those willing to invest with a robo-advisor need to learn by heart the mistakes that are most common in forex trading. Instead, providers make it comparatively easy for those willing to invest, explaining that they can act quasi independently as full-service providers because they have a BaFin permit, or they can only act as intermediaries as half-service providers. Further financially decisive details, such as the available investment strategies and specifications on service fees or one-time deposits, can be read in clear form in the robo-advisor comparison.