robo-advisor
{{Short description|Financial advisory software}}
{{Personal finance}}
Robo-advisors or robo-advisers are financial advisers that provide personalized financial advice and investment management online with moderate to minimal human intervention.{{cite news | url=https://www.nytimes.com/2014/04/12/your-money/start-ups-offer-financial-advice-to-people-who-arent-rich.html | title=Financial Advice for People Who Aren't Rich | first=Ron | last=Lieber | publisher=The New York Times | date=April 11, 2014}} A robo-advisor provides digital financial advice that is personalised 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.D'Acunto, Francesco & Prabhala, N. & Rossi, Alberto G. (2019). [https://academic.oup.com/rfs/article/32/5/1983/5427774 "The Promises and Pitfalls of Robo-Advising" Review of Financial Studies ]
Robo-advisors are categorized based on the extent of personalization, discretion, involvement, and human interaction.D'Acunto, Francesco & Rossi, Alberto G. (2020). [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3545554 "Robo-Advising." Available at SSRN ] There are over 100 robo-advisory services.{{cite web | url=https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Robo_No_2.pdf | title=Robo-Advisory in Wealth Management | publisher=Deloitte Consulting GmbH | date=October 2016}}{{Cite web | url=https://www.atkearney.com/documents/10192/7132014/Hype+vs.+Reality_The+Coming+Waves+of+Robo+Adoption.pdf | title=Hype vs. Reality: The Coming Waves of "Robo" Adoption | publisher=A.T. Kearney | date=June 2015}} 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.{{Cite web | url=https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Deloitte-Robo-safe.pdf | title=The expansion of Robo-Advisory in Wealth Management | publisher=Deloitte Consulting | date=August 2016}} 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.{{cite news | url=http://www.businessinsider.com/robo-advisors-online-financial-advisors-automated-investing-2017-1 | title=Robo Advisors: Online Financial Advisors That Fit in Your Pocket | first=Andrew | last=Meola | publisher=Business Insider | date=January 4, 2017}} 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-advisor Betterment was launched in 2010 as a direct-to-consumer model by Jon Stein,{{Cite web |url=https://betterment.com/resources/the-history-of-betterment |publisher=betterment.com | title=The History of Betterment: Changing an Industry |access-date=2016-07-20 |url-status=dead |archive-url=https://web.archive.org/web/20220405210702/betterment.com/resources/the-history-of-betterment |archive-date=2022-04-05}} followed in 2011 by Wealthfront.{{Cite web |url=https://www.investmentnews.com/fintech/wealthfront-reaches-50b-aum-milestone-2023-revenue-growth-near-140/245865 |title=Wealthfront reaches $50B AUM milestone, 2023 revenue growth near 140% |date=17 November 2023 |access-date=2025-06-05}} Thereafter, robo-advisors increased in popularity.{{cite news | url=http://www.barrons.com/articles/robo-advisors-take-on-wall-street-1432349473 | title=Robo Advisors Take On Wall Street | first=Alexander | last=Eule | publisher=Barron's newspaper | date=May 23, 2015}} Before robo-advisers, online portfolio management interfaces existed since the early 2000s and these interfaces were used by financial managers to manage and balance clients' assets. By the end of 2015, several robo-advisers from around the globe were managing $60 billion in assets of clients.{{Cite web |url=https://www.algonest.com/site/robo-content/|title=Robo-Advisor: Future to Financial Management? |publisher=algonest.com |access-date=2018-06-27 |url-status=dead |archive-url=https://web.archive.org/web/20190106025105/https://www.algonest.com/site/robo-content |archive-date=2019-01-06}}
In 2012, MoneyFarm was launched in Italy.{{Cite web |url=https://www.finextra.com/newsarticle/28104/robo-advisor-moneyfarm-raises-eur16m-for-uk-launch |title=Robo-advisor MoneyFarm raises EUR16m for UK launch |date=9 November 2015 |access-date=2025-06-05}} In 2013, Nutmeg was launched in the United Kingdom.{{Cite web |url=https://www.bbc.com/news/business-29122871 |title=The start-up rejected by investors 45 times in a row |date=10 September 2014 |access-date=2025-06-05}} In 2014, Stockspot was launched in Australia,{{Cite web |url=https://www.adelaidenow.com.au/business/breaking-news/stockspot-slashes-fees-to-zero/news-story/dd090af1ce7231d95a0f2385381a3e66 |title=Stockspot slashes fees to zero |date=18 February 2015 |access-date=2025-06-05}} followed there in 2015 by QuietGrowth.{{Cite web |url=https://www.privatebankerinternational.com/news/quietgrowth-unveils-new-feature-to-help-investors-manage-risk-210616-4929296 |title=QuietGrowth unveils new feature to help investors manage risk |date=21 June 2016 |access-date=2025-06-05}} In 2015, 8 Securities launched one of Asia's first robo-advisors in Japan,{{Cite web |url=https://fundselectorasia.com/nomura-buys-into-hk-robo-advisor |title=Nomura buys into HK robo-advisor |date=3 April 2018 |access-date=2019-08-29}} followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi.{{Cite web |url=https://www.japantimes.co.jp/news/2016/04/25/reference/first-time-investors-urged-turn-inexpensive-robo-advisers/#.XWdvXOj7SUk |title=First-time investors urged to turn to inexpensive 'robo-advisers' |date=25 April 2016 |access-date=2019-08-29}} In 2017, Singapore based StashAway received a capital markets services license from the Monetary Authority of Singapore.{{Cite news |url=https://www.businesstimes.com.sg/companies-markets/mas-proposes-moves-to-support-growth-of-robo-advisory-firms-0 |title=MAS proposes moves to support growth of robo advisory firms |last=Cua |first=Genevieve |publisher=The Business Times |access-date=2018-08-31}}
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 personalized financial advice. Most robo-advisor services are instead limited to providing discretionary portfolio management,{{Cite news|url=https://www.betterment.com/category/robo-advisor|title=Robo-Advisors: An Introduction to Online Financial Advice|publisher=Betterment|access-date=2019-01-11}} 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||date=October 2024}} 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.{{Cite web|url=https://moneysmart.gov.au/financial-advice/choosing-a-financial-adviser|title=Choosing a financial adviser|publisher=Moneysmart by Australian Securities and Investments Commission (ASIC)|access-date=December 12, 2021}}
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".{{Cite web |first1=Mike |last1=Byrnes |date=2016-03-17 |title=Robo-Advisor Warns: The Zombies Are Coming! |url=https://www.economiapersonal.com.ar/ |access-date=2021-09-11 |publisher=Economía Personal |language=es}}
An investment platform, even if it provides automated service, cannot be termed as a robo advisor if it does not provide personalised investment advice.
Areas served
While robo-advisors are most common in the United States, they are also present in Germany, Australia,{{cite web|url=http://www.smh.com.au/business/banking-and-finance/asics-greg-medcraft-says-robo-advice-can-reduce-fees-and-conflicts-20151105-gkrmxw.html|title=ASIC's Greg Medcraft says 'robo advice' can reduce fees and conflicts|date=5 November 2015 }} India,{{Cite web | url=http://www.livemint.com/Money/DOnQjdoOqd38ijz30HgtGM/Robo-advisory-could-change-distribution.html | title=Robo advisory could change distribution | first=Kayezad E. | last=Adajania | publisher=LiveMint | date=September 22, 2015}} Canada,{{cite news|url=https://www.ledevoir.com/economie/actualites-economiques/452848/investissement-preparer-sa-retraite-un-texto-a-la-fois|title=Préparer sa retraite, un texto à la fois|date=October 17, 2015|newspaper=Le Devoir|language=fr|trans-title=Preparing your retirement, one SMS at a time|author=François Desjardins|access-date=December 5, 2015}} and Singapore.{{cite news | url=https://www.reuters.com/article/us-wealth-summit-mesitis/singapore-start-up-to-launch-robo-adviser-to-tap-tech-savvy-rich-idUSKCN0Z10S7 | title=Singapore start-up to launch robo adviser to tap tech-savvy rich | work=Reuters | date=June 15, 2016}}
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), 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.{{cite web | url=https://www.kiplinger.com/slideshow/investing/T023-S002-best-of-the-online-investment-advisers-2014/index.html |title=Best of the Online Investment Advisers | date=June 2014}}
The portfolios that robo-advisors offer are typically exchange-traded funds, but some offer portfolios of individual stocks.{{cite web | url=https://www.emperorinvests.com/pure-stock-investing |title=The Stock Advantage |access-date=2021-12-24}} Typically they employ modern portfolio theory, which minimizes risk for a given expected return. Some are designed for use with socially responsible investing, Halal investing, or strategies similar to hedge funds.
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.{{cite web|url=http://www.kitces.com/blog/the-real-hidden-cost-that-has-been-inhibiting-financial-planning-for-the-masses/|title=The Real Hidden Cost That Has Been Inhibiting Financial Planning For The Masses | date=December 16, 2013}} The average financial planner has a minimum investment amount of $50,000,{{cite web | url=http://www.advisoryhq.com/articles/financial-advisor-fees-wealth-managers-planners-and-fee-only-advisors/ | title=How Much Does a Financial Advisor Cost? (Average RIA & Financial Advisor Fees in 2016)}} while minimum investment amounts for robo-advisors start as low as $500 in the United States{{cite web|url=http://www.investmentzen.com/best-robo-advisors#account-minimums|title=What is the Best Robo Advisor?}} and as low as £1 in the United Kingdom.{{Cite web|url=https://www.off3r.com/compare/best-robo-advisors|title=Robo-Advisors Comparison with OFF3R|publisher=off3r.com|access-date=2018-01-03}} In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2 percent to 1.0 percent of Assets Under Management,{{cite web | url=https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Robo-Advisory-in-Wealth-Management.pdf | title=Cost-Income Ratios and Robo-Advisory | publisher=Deloitte Consulting GmbH |date=December 2016}} while traditional financial planners charged average fees of 1.35 percent of Assets Under Management, according to a survey conducted by AdvisoryHQ News.
Regulation
In the United States, robo-advisors must be registered investment advisors, which are regulated by the Securities and Exchange Commission.{{Cite web|title=Print 2 {{!}} PDF {{!}} Financial Technology {{!}} Finance & Money Management|url=https://www.scribd.com/document/435609625/Print2|access-date=2021-09-11|website=Scribd|language=en}} 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:{{cite web | last=Friedberg | first=Barbara | title=Top-10 Robo-Advisors By Assets Under Management | publisher=Forbes Advisor | date=2021-09-27 | url=https://www.forbes.com/advisor/investing/top-robo-advisors-by-aum/ | access-date=2023-01-28}}
| class="wikitable"
! Company ! Country ! Clients |
| The Vanguard Group
| U.S. || $206.6 billion || 1,100,000 |
|---|
| Wealthfront
| U.S. || $75.0 billion || 1,000,000 |
| Charles Schwab
| U.S. || $65.8 billion || 262,000 |
| Betterment
| U.S. || $26.8 billion || 615,000 |
| Personal Capital
| U.S. || $16.1 billion || 26,000 |