This is now known as robo-advice, an automated online service that provides one with advice and management of ones investments with little human interaction. Robo-advisors build and manage and offer investment portal that offer services like advice and portfolio management and rebalancing for costs much lower than any human financial consultant could.
The Beginning of Robo-advisors
The first robo-advisors came out around 2008 during a world financial crisis where people started to lose faith in the conventional financial advisor. The first of the robo-advisory firms are Betterment and Wealthfront. What was the primary value proposition of it? To use technology to provide sound investment guidance to the general public at a fraction of the cost of the typical advisor.
These have evolved over the years, from the old Robo-advisors to the new. While the early days for Robo-advisors were simple and only provided investment advisory solutions, modern Robo-advisors are more advanced, providing solutions to other financial planning needs such as taxes, college savings, retirement, and credit. Robo-Advisors use complex methodologies, including machine learning, to analyze the data of the client and the data of the financial market and derive a strategy tailored to that individual investor.
How Robo-Advisors Work
It is during the onboarding process that a Robo-advisor gathers data from clients regarding their financial status, tolerance towards risk, time frame for investments, personalized goals among other aspects. Such information is then analyzed by algorithms to develop the suitable investment strategy and investment portfolio for the client. The algorithms invest, track, adjust, and optimize client portals to ensure that they are on track to meeting the target financial profile of the client.
Robo-advisors create diversified portfolios based on Exchange Traded Funds (ETFs) and index funds rather than single stocks. This makes it possible to diversify and also make costs efficient. They are cheaper than conventional financial advisors by charging less than half AUM, or Assets Under Management fees as compared to over one-tenth of a percent fees charged by the conventional financial advisors. It is however important to note that several Robo-advisors provide initial advisory services at no cost to the client.
Benefits
There are several advantages to using a Robo-advisor for investments and financial planning: There are several advantages to using a Robo-advisor for investments and financial planning:
- Lower Costs: This is the most appealing benefit of the organization potentially implementing the solution. The cost of robo-advisors is much cheaper in comparison to the human financial planners’ fees. The high level of automation ensures that the operations costs are kept to minimum, and this savings are passed on to clients.
- Easy Account Set Up: Engaging with a Robo-advisor only requires you to open an account online in a few minutes as compared to the documents and meetings of traditional planners. Gaining exposure to the financial market is only a couple of clicks and taps away.
- Unbiased Advice: Robo-advisors Disregard individual human prejudices in the provision of advice. They systematically evaluate financial information to give advice that is in the interest of the clients.
- 24/7 Account Access: Clients can log in and manage their accounts, monitor investments, and generate reports at any time via the internet or through applications on their smartphones. No more waiting around for a meeting with one of the advisors.
- Automated Portfolio Management: Portfolio management is easy when it is done by algorithms. It eliminates the chances of making emotional decisions since your portfolio is rebalanced and optimized for you.
- Tax-loss Harvesting: Many Robo-advisors monitor their portfolios frequently for tax-loss harvesting opportunities which can save the investors more money in taxes.
The Disadvantages of Hiring a Robo-advisor
While it make investing and financial planning easier and more accessible, they also come with some limitations: While it make investing and financial planning easier and more accessible, they also come with some limitations:
- Lack of Human Touch: There are some cons of using robo-advisors which include the fact that such advisors do not pick on some details that a human advisor would easily identify when doing a comprehensive analysis on the client. Algorithms have limitations.
- Commoditized Advice: The advice may sound rather generic as machines base their recommendations on similar questionnaires. There is little customization.
- Not for Complex Situations: I find robo-advisors suitable for first-time entrants into investment with small and uncomplicated investments. They may not be as helpful in providing guidance about how to handle difficult money issues.
- Reliance on Technology: Situations such as programming problems or web site crashes may sometimes ‘lock’ your money when an immediate solution is required.
- Limited Investment Options: The choice of ETFs and funds can also be restricted since robo-advisors usually work with a narrow range of options thus reducing flexibility.
The Future of Robo-Advisors
Robo-advisors are poised to redefine the wealth management industry at an unprecedented rate. Robo-advisor reported assets under management are expected to hit $7.2 trillion by 2022. Advancements such as machine learning, predictive analytics, and blockchain could build on these possibilities and change the way Robo-advisors collect information, understand markets, personalise advice, and manage money.
Many large banks, financial organizations, and investment companies are increasing the development of Robo-advisors by incorporating them into their product offering to meet customer demand. Thus, while human financial advisors will continue to serve and maintain the lucrative high net worth clientele, the technology-implementing automated Robo-advisors are undeniably the wave of the future of the mainstream retail investment management.
Artificial Intelligence Embedding
With the constant development of artificial intelligence, and as this technology is further refined, robo-advisors will probably be able to dispense personalized investment advice even more so than they already do. An AI robo-advisor could analyze more data points such as social and economic trends and come up with an even more precise and personalized investment plan. But this could in turn increase the efficiency level for robo-advisors and make them that much more appealing to investors.
Hybrid Models
convenience at low costs, while ensuring personalized service.
Diversification of Offerings
As the robo-advisor market becomes more competitive, those platforms will probably start to branch out and offer more services to entice and keep clients. This will possibly feature an increased inclusion of deeper financial planning services such as retirement planning, tax optimization, and estate planning. In this sense, as the robo-advisor grows its service menu, it will have the ability to tap into more segments and satisfy the diverse appetites of investors.
More Personalization
In the future, robo-advisors may offer even greater customization opportunities in which investors tailor their portfolios to align with specific preferences, such as SRI or ESG criteria. That kind of personalization could appeal to socially responsible investors, those that care about matching their investments with their ideals.
Global Expansion
Right now, robo-advisors are more prevalent in the more developed markets of the USA, Europe, and Canada. However this would definitely alter when the technology has advanced and awareness has grown. That would open up millions of new investors to affordable, tailored investment advice-further democratizing wealth management.
Conclusion
So far robo-advisors have taken over wealth management because they provide the most simple form of investment at the lowest cost, all geared to the needs of the investor. Because of technology robo-advisors make it possible for anyone to get professional financial advice, more so then it ever has been. Thus all the benefits of robo-advisors, minimal fees, availability, clarity, all put together, allows them to explode in growth and appeal to all classes of investors.
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