Robo-advisors or robo-advisers are a class of
financial adviser
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
that provide financial advice and
investment management
Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institut ...
online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms. These algorithms are designed by financial advisors, investment managers and data scientists, and coded in software by programmers. These algorithms are executed by software and do not require a human advisor to impart financial advice to a client. The software utilizes its algorithms to automatically allocate, manage and optimize clients' assets for either short-run or long-run investment.
[D'Acunto, Francesco & Prabhala, N. & Rossi, Alberto G. (2019)]
"The Promises and Pitfalls of Robo-Advising." Review of Financial Studies
/ref> Robo-advisors are categorized based on the extent of personalization, discretion, involvement, and human interaction.[D'Acunto, Francesco & Rossi, Alberto G. (2020)]
"Robo-Advising." Available at SSRN
/ref>
There are over 100 robo-advisory services. Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience with lower cost compared to traditional human advice. Robo-advisors collect financial situation information from the client to determine risk tolerance. Then robo-advisors allocate a client's assets on the basis of risk preferences and desired target return. While robo-advisors have the capability of allocating client assets in many investment products such as stocks, bonds, futures, commodities, and real estate, the advice is often directed towards exchange-traded funds.[ Clients can choose between offerings with passive asset allocation techniques or active asset management styles.][
]
History
The first robo-advisors were launched in 2008 during the financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
. In 2010, Jon Stein, a 30-year old entrepreneur, launched Betterment
In real estate, betterment is the increased value of real property from causes other than investment made by the property owner. It is, therefore, usually referred to as unearned increment or windfall gain.
When, for instance, a property is rez ...
, and robo-advisors increased in popularity. The first robo-advisers were used as online interfaces by financial managers to manage and balance clients' assets. Robo-adviser technology was not new to this field, as this kind of software has been in use by financial advisers and managers since the early 2000s. But they were made publicly available in 2008 for the first to general public who were in dire need of managing their assets personally. By the end of 2015, robo-advisers from almost 100 companies around the globe were managing $60 billion assets of clients. In June 2016, robo-advisor Wealthfront
Wealthfront Inc. is an automated investment service firm based in Palo Alto, California, founded by Andy Rachleff and Dan Carroll in 2008. As of September 2019, Wealthfront had $21 billion AUM across 400,000 accounts.
History
Wealthfront was f ...
announced a partnership with the Nevada State Treasurer
The Nevada State Treasurer is an elected office in the U.S. state of Nevada. The Nevada State Treasurer is based in Carson City, Nevada. The Treasurer is elected to a four-year term and may serve for eight years or two terms under Nevada's term li ...
to offer a 529 plan for college savings.
In 2015, Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...
based 8 Securities launched one of Asia's first robo-advisors in Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
, followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi. In 2017, Singapore based StashAway received a capital markets services license from the Monetary Authority of Singapore
The Monetary Authority of Singapore (MAS) is the central bank and financial regulatory authority of Singapore. It administers the various statutes pertaining to money, banking, insurance, securities and the financial sector in general, as well ...
. In 2019, another Singapore-based digital wealth management platform, Syfe, received a capital markets services license from MAS.
Definition
A robo-advisor can be defined as "a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms". Some robo-advisors do have an element of human interference and supervision.
Legally, the term "financial advisor" applies to any entity giving advice about securities. Most robo-advisor services are instead limited to providing portfolio management (i.e. allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management, which are also the domain of financial planning.
Robo advisors provide "personal financial advice" in addition to "general financial advice". Personal financial advice is tailored to the financial situation and goals of the client, and is in their best interests. General financial advice doesn't take into account the personal situation or goals of the client, or how it might affect them personally.
Other designations for these financial technology
Fintech, a portmanteau of "financial technology", refers to firms using new technology to compete with traditional financial methods in the delivery of financial services. Artificial intelligence, blockchain, cloud computing, and big data are r ...
companies include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor".
Areas served
While robo-advisors are most common in the United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, they are also present in Germany
Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
,[ ]Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
, India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
, Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
, and Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borde ...
.
Robo-advisors are extending into newer business avenues, such as advising retail customers on how much money to spend vs. save, how to plan for retirement and decumulation (selling off securities over time), and tax loss harvesting.
Methodology
The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession.
The portfolio
Portfolio may refer to:
Objects
* Portfolio (briefcase), a type of briefcase
Collections
* Portfolio (finance), a collection of assets held by an institution or a private individual
* Artist's portfolio, a sample of an artist's work or a ...
s that robo-advisors offer are typically exchange-traded funds, but some offer portfolios of individual stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s. Typically they employ modern portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...
, which minimizes risk for a given expected return. Some are designed for use with socially responsible investing
Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about soci ...
, Halal investing, or strategies similar to hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
s.
Consumer access
The customer acquisition costs and time constraints faced by traditional human advisors have left many middle-class investors underadvised or unable to obtain portfolio management services because of the minimums imposed on investable assets. The average financial planner has a minimum investment amount of $50,000, while minimum investment amounts for robo-advisors start as low as $500 in the United States and as low as £1 in the United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
. In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2% to 1.0% of Assets Under Management while traditional financial planners charged average fees of 1.35% of Assets Under Management according to a survey conducted by AdvisoryHQ News.
Regulation
In the United States, robo-advisors must be registered investment advisor A registered investment adviser (RIA) is a firm that is an investment adviser in the United States, registered as such with the Securities and Exchange Commission (SEC) or a state's securities agency. The numerous references to RIAs within the Inves ...
s, which are regulated by the Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
. In the United Kingdom they are regulated by the Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
.
In Australia, the robo-advisors manage the client money through the Managed Discretionary Account (MDA) structure.
Total assets under management
As of October 2017, robo-advisors had $224 billion in assets under management.
The following are the largest robo-advisors by assets under management:
References
{{Investment-management
*
Online financial services companies
Web applications
Financial advisors