Robo-advisor

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Robo-advisors or robo-advisers are financial advisers that provide financial advice and investment management online with moderate to minimal human intervention. [1] A robo-advisor provides digital financial advice based on mathematical rules or algorithms. These algorithms are designed by human 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]

Contents

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 Betterment was launched in 2010 as a direct-to-consumer model by Jon Stein. [8] Thereafter, robo-advisors increased in popularity. [9] 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. [10] In June 2016, robo-advisor Wealthfront announced a partnership with the Nevada State Treasurer to offer a 529 plan for college savings. [11]

In 2015, Hong Kong based 8 Securities launched one of Asia's first robo-advisors in Japan, [12] followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi. [13] In 2017, Singapore based StashAway received a capital markets services license from the Monetary Authority of Singapore. [14]

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. [15]

Legally, the term "financial advisor" applies to any entity giving financial advice. Most robo-advisor services are instead limited to providing portfolio management, [16] that is the allocation of 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.[ citation needed ] 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. [17]

Other designations for the financial technology companies that program robo advisor software include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor". [18]

Areas served

While robo-advisors are most common in the United States, they are also present in Germany, [4] Australia, [19] India, [20] Canada, [21] and Singapore. [22]

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. [23]

Methodology

The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession. [24]

The portfolios that robo-advisors offer are typically exchange-traded funds, but some offer portfolios of individual stocks. [2] [25] Typically they employ modern portfolio theory, which minimizes risk for a given expected return. [23] Some are designed for use with socially responsible investing, Halal investing, or strategies similar to hedge funds. [23]

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. [26] The average financial planner has a minimum investment amount of $50,000, [27] while minimum investment amounts for robo-advisors start as low as $500 in the United States [28] and as low as £1 in the United Kingdom. [29] In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2 percentt to 1.0 percent of Assets Under Management, [30] while traditional financial planners charged average fees of 1.35 percent of Assets Under Management, according to a survey conducted by AdvisoryHQ News. [27]

Regulation

In the United States, robo-advisors must be registered investment advisors, which are regulated by the Securities and Exchange Commission. [31] In the United Kingdom they are regulated by the Financial Conduct Authority.

Robo advisors that manage client money offer discretionary accounts for the clients. This sets them apart from micro investing firms, managed funds and investing platforms. In Australia, the robo-advisors manage the client money through the Managed Discretionary Account (MDA) structure.

Total assets under management

The following are the largest robo-advisors by assets under management: [32]

CompanyCountry 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

Related Research Articles

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 institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts/mandates or via collective investment schemes like mutual funds, exchange-traded funds, or Real estate investment trusts.

In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institution—or a decentralized network protocol manages and invests, typically on behalf of its clients. Funds may be managed for clients, platform users, or solely for themselves, such as in the case of a financial institution which has mutual funds or holds its own venture capital. The definition and formula for calculating AUM may differ from one entity to another.

<span class="mw-page-title-main">Wealth management</span> Investment management and financial planning service

Wealth management (WM) or wealth management advisory (WMA) is an investment advisory service that provides financial management and wealth advisory services to a wide array of clients ranging from affluent to high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals and families. It is a discipline which incorporates structuring and planning wealth to assist in growing, preserving, and protecting wealth, whilst passing it onto the family in a tax-efficient manner and in accordance with their wishes. Wealth management brings together tax planning, wealth protection, estate planning, succession planning, and family governance.

<span class="mw-page-title-main">Private banking</span> Special banking for wealthy individuals

Private banking is a general description for banking, investment and other financial services provided by banks and financial institutions primarily serving high-net-worth individuals (HNWIs) – those with very high income or substantial assets. Private banking is presented by those who provide such services as an exclusive subset of wealth management services, provided to particularly affluent clients. The term "private" refers to customer service rendered on a more personal basis than in mass-market retail banking, usually provided via dedicated bank advisers. It has typically consisted of banking services, discretionary asset management, brokerage, limited tax advisory services and some basic concierge services, typically offered through a gateway provided by a single designated relationship manager.

<span class="mw-page-title-main">Financial adviser</span> Professional who renders financial services to clients

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 body in order to provide advice.

A multi-family office (MFO) is an independent organization that supports multiple families to manage their entire wealth. Multi-family offices typically provide a variety of services including tax and estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, coordination of professionals, investment advice, and philanthropic foundation management. Some multi-family offices are also known to offer personal services such as managing household staff and making travel arrangements. Because the customized services offered by a multi-family office can be costly, clients of a multi-family office typically have a net worth in excess of $50 million.

An Investment advisory, is a service that recommends certain securities primed for appreciation, usually through direct management of clients' assets or by way of written publications.

In the investment management industry, a separately managed account (SMA) is any of several different types of investment accounts. For example, an SMA may be an individual managed investment account; these are often offered by a brokerage firm through one of their brokers or financial consultants and managed by independent investment management firms ; they have varying fee structures. These particular types of SMAs may be called "wrap fee" or "dual contract" accounts, depending on their structure. There is no official designation for the SMA, but there are common characteristics that are represented in many types of SMA programs. These characteristics include an open structure or flexible investment security choices; multiple money managers; and a customized investment portfolio formulated for a client's specific investment objectives or desired restrictions.

Betterment is an American financial advisory company which provides digital investment, retirement and cash management services.

<span class="mw-page-title-main">Merrill Edge</span> Electronic trading platform provided by BofA Securities

Merrill Edge is an electronic trading platform and investment advisory service that provides self-directed and guided investment options for individuals and businesses. It is a subsidiary of Bank of America and was launched in 2010 after the merger between Merrill Lynch and Bank of America. Merrill Edge offers a wide range of investment products, including stocks, bonds, exchange-traded funds (ETFs), margin lending, mutual funds, and options.

<span class="mw-page-title-main">Wealthfront</span> Automated investment service firm

Wealthfront Inc. is an automated investment service firm based in Palo Alto, California, founded by Andy Rachleff and Dan Carroll in 2008. As of October 2024, Wealthfront had over $75 billion AUM across more than 1,000,000 accounts.

Index Fund Advisors (IFA) is an American registered investment advisor (RIA) headquartered in Irvine, California, with representatives in several locations across the United States. IFA pioneered the idea of the Robo-Advisor when it first published their website on November 9, 1999.

Stockspot is an Australian online investment adviser and fund manager based in Sydney.

Hedgeable, Inc. was a U.S. based financial services company and digital wealth management platform headquartered in New York City. Hedgeable was known for not following set allocations, and instead actively managing accounts in response to market movements.

Personal Capital is an online financial advisor and personal wealth management company headquartered in Redwood Shores, CA with offices in San Francisco, CA, Denver, CO, Dallas, TX and Atlanta, GA.

Wealthminder is a software company founded by CEO Rich Ellinger.

BMO SmartFolio is a digital investment management service offered by Canada’s Bank of Montreal. Broadly referred to as a robo-advisor, the service allows investors to answer a series of questions online about their investment goals, time horizon and risk tolerance, then are recommended a model portfolio made up of index-tracking exchange-traded funds based on the investor’s profile, managed by financial professionals with BMO Global Asset Management and BMO Nesbitt Burns.

Wealthsimple Inc. is a Canadian online investment management service. The firm was founded in September 2014 by Michael Katchen, Brett Huneycutt, Som Seif, and Rudy Adler and is based in Toronto. As of September 18, 2024, the firm holds over C$50 billion in assets under management. It is primarily owned by Power Corporation indirectly at 55.1% through investments made through their holdings in Power Financial, IGM Financial and Portag3.

Steve Lockshin is an American financial advisor, entrepreneur and financial author that has focusing on ultra high-net-worth clients and estate planning.

Edelman Financial Engines is an American financial planning and investment advisory company. As of December 31, 2023, it has more than $270 billion in assets and more than 1.3 million clients. The company was formed by the 2018 merger of Financial Engines and Edelman Financial Services.

References

  1. ↑ Lieber, Ron (April 11, 2014). "Financial Advice for People Who Aren't Rich". The New York Times.
  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. August 2016.
  7. ↑ Meola, Andrew (January 4, 2017). "Robo Advisors: Online Financial Advisors That Fit in Your Pocket". Business Insider.
  8. ↑ "The History of Betterment: Changing an Industry". betterment.com. Archived from the original on 2022-04-05. Retrieved 2016-07-20.
  9. ↑ Eule, Alexander (May 23, 2015). "Robo Advisors Take On Wall Street". Barron's newspaper.
  10. ↑ "Robo-Advisor: Future to Financial Management?". algonest.com. Archived from the original on 2019-01-06. Retrieved 2018-06-27.
  11. ↑ Davis, Andrea (June 3, 2016). "Wealthfront leads robo expansion into college savings plans".
  12. ↑ "Nomura buys into HK robo-advisor". 3 April 2018. Retrieved 2019-08-29.
  13. ↑ "First-time investors urged to turn to inexpensive 'robo-advisers'". 25 April 2016. Retrieved 2019-08-29.
  14. ↑ Cua, Genevieve. "MAS proposes moves to support growth of robo advisory firms". The Business Times. Retrieved 2018-08-31.
  15. ↑ "What Is a Robo-Advisor?". Investopedia. Retrieved 2021-09-27.
  16. ↑ "Robo-Advisors: An Introduction to Online Financial Advice". Betterment. Retrieved 2019-01-11.
  17. ↑ "Choosing a financial adviser". Moneysmart by Australian Securities and Investments Commission (ASIC). Retrieved December 12, 2021.
  18. ↑ Byrnes, Mike (2016-03-17). "Robo-Advisor Warns: The Zombies Are Coming!" (in Spanish). Economía Personal. Retrieved 2021-09-11.
  19. ↑ "ASIC's Greg Medcraft says 'robo advice' can reduce fees and conflicts". 5 November 2015.
  20. ↑ Adajania, Kayezad E. (September 22, 2015). "Robo advisory could change distribution". LiveMint.
  21. ↑ 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.
  22. ↑ "Singapore start-up to launch robo adviser to tap tech-savvy rich". Reuters . June 15, 2016.
  23. 1 2 3 Jake Frankenfield (16 November 2021). "Robo-Advisor". Investopedia.
  24. ↑ "Best of the Online Investment Advisers". June 2014.
  25. ↑ "The Stock Advantage" . Retrieved 2021-12-24.
  26. ↑ "The Real Hidden Cost That Has Been Inhibiting Financial Planning For The Masses". December 16, 2013.
  27. 1 2 "How Much Does a Financial Advisor Cost? (Average RIA & Financial Advisor Fees in 2016)".
  28. ↑ "What is the Best Robo Advisor?".
  29. ↑ "Robo-Advisors Comparison with OFF3R". off3r.com. Retrieved 2018-01-03.
  30. ↑ "Cost-Income Ratios and Robo-Advisory" (PDF). Deloitte Consulting GmbH. December 2016.
  31. ↑ "Print 2 | PDF | Financial Technology | Finance & Money Management". Scribd. Retrieved 2021-09-11.
  32. ↑ Friedberg, Barbara (2021-09-27). "Top-10 Robo-Advisors By Assets Under Management". Forbes Advisor. Retrieved 2023-01-28.
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