Robo-advisors or robo-advisers are a class of financial adviser that provide financial advice and investment management online with moderate to minimal human intervention.[1] 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.[2] Robo-advisors are categorized based on the extent of personalization, discretion, involvement, and human interaction.[3]

There are over 100 robo-advisory services.[4][5] Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience at a lower cost than traditional human advice.[6] 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.[7] 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.[4] Clients can choose between offerings with passive asset allocation techniques or active asset management styles.[4]

History

The first robo-advisor Wealthfront (formerly known as KaChing) was launched in 2008.[8][9] Thereafter, robo-advisors increased in popularity.[10] 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 time to the 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 in assets of clients.[11] In June 2016, robo-advisor Wealthfront announced a partnership with the Nevada State Treasurer to offer a 529 plan for college savings.[12]

In 2015, Hong Kong based 8 Securities launched one of Asia's first robo-advisors in Japan,[13] followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi.[14] In 2017, Singapore based StashAway received a capital markets services license from the Monetary Authority of Singapore.[15]

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.[16]

Legally, the term "financial advisor" applies to any entity giving advice about securities. Most robo-advisor services are instead limited to providing portfolio management[17] (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.[18]

Other designations for these financial technology companies include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor".[19]

Areas served

While robo-advisors are most common in the United States, they are also present in Germany,[4] Australia,[20] India,[21] Canada,[22] and Singapore.[23]

Robo-advisors are extending into different aspects of financial advice, such as advising retail customers on how much money to spend versus save, how to plan for retirement and decumulation (selling off securities over time),[3] and tax loss harvesting.[24]

Methodology

The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession.[25]

The portfolios that robo-advisors offer are typically exchange-traded funds, but some offer portfolios of individual stocks.[2][26] Typically they employ modern portfolio theory, which minimizes risk for a given expected return.[24] Some are designed for use with socially responsible investing, Halal investing, or strategies similar to hedge funds.[24]

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.[27] The average financial planner has a minimum investment amount of $50,000,[28] while minimum investment amounts for robo-advisors start as low as $500 in the United States[29] and as low as £1 in the United Kingdom.[30] 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,[31] while traditional financial planners charged average fees of 1.35% of Assets Under Management, according to a survey conducted by AdvisoryHQ News.[28]

Regulation

In the United States, robo-advisors must be registered investment advisors, which are regulated by the Securities and Exchange Commission.[32] In the United Kingdom they are regulated by the Financial Conduct Authority.

Total assets under management

The following are the largest robo-advisors by assets under management:[33]

Company Country Assets under management Clients
The Vanguard Group U.S.$206.6 billion1,100,000
Charles Schwab U.S.$65.8 billion262,000
Wealthfront U.S.$50.0 billion700,000
Betterment U.S.$26.8 billion615,000
Personal Capital U.S.$16.1 billion26,000

References

  1. ↑ Lieber, Ron (April 11, 2014). "Financial Advice for People Who Aren't Rich". The New York Times.(subscription required)
  2. 1 2 D'Acunto, Francesco & Prabhala, N. & Rossi, Alberto G. (2019). "The Promises and Pitfalls of Robo-Advising." Review of Financial Studies
  3. 1 2 D'Acunto, Francesco & Rossi, Alberto G. (2020). "Robo-Advising." Available at SSRN
  4. 1 2 3 4 "Robo-Advisory in Wealth Management" (PDF). Deloitte Consulting GmbH. October 2016.
  5. ↑ "Hype vs. Reality: The Coming Waves of "Robo" Adoption" (PDF). A.T. Kearney. June 2015.
  6. ↑ "The expansion of Robo-Advisory in Wealth Management" (PDF). Deloitte Consulting GmbH. August 2016.
  7. ↑ Meola, Andrew (January 4, 2017). "Robo Advisors: Online Financial Advisors That Fit in Your Pocket". Business Insider.
  8. ↑ "Wealthfront From 0 to 25 billion in assets under management". 31 August 2021. Retrieved 2023-11-27.
  9. ↑ "SEC Gives Social Investing Site kaChing Green Light To Take On Mutual Funds". www.techcrunch.com. 2008-12-15.
  10. ↑ Eule, Alexander (May 23, 2015). "Robo Advisors Take On Wall Street". Barron's.
  11. ↑ "Robo-Advisor: Future to Financial Management?". www.algonest.com. Archived from the original on 2019-01-06. Retrieved 2018-06-27.
  12. ↑ Davis, Andrea (June 3, 2016). "Wealthfront leads robo expansion into college savings plans".
  13. ↑ "Nomura buys into HK robo-advisor". 3 April 2018. Retrieved 2019-08-29.
  14. ↑ "First-time investors urged to turn to inexpensive 'robo-advisers'". 25 April 2016. Retrieved 2019-08-29.
  15. ↑ Cua, Genevieve. "MAS proposes moves to support growth of robo advisory firms". The Business Times. Retrieved 2018-08-31.
  16. ↑ "What Is a Robo-Advisor?". Investopedia. Retrieved 2021-09-27.
  17. ↑ "Robo-Advisors: An Introduction to Online Financial Advice". Betterment. Retrieved 2019-01-11.
  18. ↑ "Choosing a financial adviser". Moneysmart by Australian Securities and Investments Commission (ASIC). Retrieved December 12, 2021.
  19. ↑ Byrnes, Mike (2016-03-17). "Robo-Advisor Warns: The Zombies Are Coming!". Economía Personal (in Spanish). Retrieved 2021-09-11.
  20. ↑ "ASIC's Greg Medcraft says 'robo advice' can reduce fees and conflicts". 5 November 2015.
  21. ↑ Adajania, Kayezad E. (September 22, 2015). "Robo advisory could change distribution". LiveMint.
  22. ↑ François Desjardins (October 17, 2015). "Préparer sa retraite, un texto à la fois" [Preparing your retirement, one SMS at a time]. Le Devoir (in French). Retrieved December 5, 2015.
  23. ↑ "Singapore start-up to launch robo adviser to tap tech-savvy rich". Reuters. June 15, 2016.
  24. 1 2 3 Jake Frankenfield (16 November 2021). "Robo-Advisor". Investopedia.
  25. ↑ "Best of the Online Investment Advisers". June 2014.
  26. ↑ "The Stock Advantage". Retrieved 2021-12-24.
  27. ↑ "The Real Hidden Cost That Has Been Inhibiting Financial Planning For The Masses". December 16, 2013.
  28. 1 2 "How Much Does a Financial Advisor Cost? (Average RIA & Financial Advisor Fees in 2016)".
  29. ↑ "What is the Best Robo Advisor?".
  30. ↑ "Robo-Advisors Comparison with OFF3R". www.off3r.com. Retrieved 2018-01-03.
  31. ↑ "Cost-Income Ratios and Robo-Advisory" (PDF). Deloitte Consulting GmbH. December 2016.
  32. ↑ "Print 2 | PDF | Financial Technology | Finance & Money Management". Scribd. Retrieved 2021-09-11.
  33. ↑ Friedberg, Barbara (2021-09-27). "Top-10 Robo-Advisors By Assets Under Management". Forbes Advisor. Retrieved 2023-01-28.
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