Robo advisory for tailor-made investment advice

“Having money with no sense of guidance is the same as being poor” ~ Anonymous

AI and machine learning has penetrated almost all walks of human life. As Stephen Hawking said, “Computers will overtake humans with AI within the next 100 years. When that happens, we need to make sure the computers have goals aligned with ours”. Consequently, the need for better management of finances, especially during the express digitization of the BFSI industry, has given rise to a new concept called robo-advisory.

Robo-advisors are digital platforms that provide automated and algorithm-driven financial and wealth management solutions, with minimal human intervention. Robo-advisors, like any financial advisor, process financial information provided by the investor and allow the investor to invest in diverse portfolios. Moreover, robo-advisors help the investor strategize his allocation of finances and perform portfolio rebalancing as per the dynamic market.

Robo-advisory came to the forefront after the Global Financial Crisis of 2008 and has been undergoing evolution since then. From offering just an online questionnaire to making fully automated investments through self-learning algorithms, robo-advisory system has come a long way.

How Robo-advisors Operate?

As stated earlier, a robo-advisor is essentially a digital platform. On this platform, a new investor wanting to avail the service will be presented with a questionnaire to evaluate his financial situation, the nature of his employment, the timeframe of investment, risk-appetite and investment goals. The algorithm processes this information to give out a score which is representative of the investor’s financial information. According to the score, the robo-advisor recommends some funds, portfolios, and equities to the investor. The finances of the investor, after the investment are again managed by the robo-advisor. Also, if permitted by the investor, such future financial decisions can be automatically taken by the robo-advisor based on its self-learning algorithm.

Types of Robo-advisors

The robo-advisory industry can be studied across several lines. One such way can be on the basis of the service provided by it viz., Fintech and Banking. The robo-advisor market is currently dominated by the fintech segment and market projection shows that it will continue to do so in the upcoming years. However, the biggest growth is expected to be in the banking segment of this industry. On similar lines, this industry can be classified on the basis of function it performs. Such classification yields to three types of robo-advisors- fund-based, equity based, and comprehensive wealth advisory. While fund-based robo-advisors help the investor to invest in single asset class funds, equity-based robo-advisors deal only in equity portfolio. Thus, the first type is more suited to novices who are averse to taking risks while second type of robo-advisors are suitable to investors who know the market fairly well. The third type, as the name suggests, offers comprehensive finance and wealth management services. They also offer financial planning based on the investment made in funds and equities.

Robo-advisory in a Post-Covid World

Covid-19 has adversely affected millions of people worldwide and has posed unprecedented challenges in front of them. It has affected business and industries across all sectors. Normalcy, however, is returning as people are finding ways to cope with the reality. Financial markets that took a severe hit during the pandemic, are showing signs of recovery. The pandemic led to a spree by various industries to digitize their services. The robo-advisory industry is no exception to this phenomenon. In fact, robo-advisory market is one of the few markets which has been positively affected by the Covid-19 pandemic. The global robo-advisory market size is projected to rise to $59.3 billion by 2028 which, in 2020, stood at just $4.6 billion. The forecasted CAGR of this market is 39.9%. According to Corporate Vision Magazine, investors signing-up for robo-advice services increased by 3.1 percent in the first quarter of 2020. This shows the increasing trend among the investors to opt for this finance management system.

Global Leaders in the Robo-advisory Market

Geography-wise, North America is currently dominating the robo-advisory market and is expected to do so in the near future. This prominence of North America is mainly attributed to the presence of several key players of this market viz., Betterment LLC, The Vanguard Group, Charles Schwab Corporation, etc. In fact, Betterment LLC pioneered this project of robo-advisory in 2010, in the backdrop of 2008 financial crisis. In recent years, many robo-advisory startups have also been established and venture capitalist are eager to invest in these corporations. MarketsMojo, Goalwise, and ArthaYantra are some such startups which have been successful in establishing a foothold in this robo-advisory market. In today’s ever-expanding market, it’s not long until the big players start facing competition from these startups.

Pros and Cons of Robo-advisors

One of the main advantages of subscribing to the robo-advisory service is that it is easy to use. Robo-advisors even provide all type of support as far as investing is concerned-right from short-term investment to retirement planning based on long-term investments. Today, tax regimes across the globe confuse and demotivate people to invest money. Robo-advisors simplify investing, using methods of tax-loss harvesting and portfolio rebalancing. Also, robo-advisor charge minimal fees and require low minimum balances. Thus, robo-advisory has emerged as a significant investment service for youngsters who are new to financial markets. However, robo-advisors are yet to achieve a level wherein they can offer fully-personalized advice to investors. Some robo-advisory systems don’t provide support for complex financial plans. Some skeptics also point out that, this service, though stable, hasn’t however been tested yet in extremely volatile markets.

Thus, over the years, the evolution of the robo-advisory service has been remarkable. Its emergence as a viable alternative to traditional financial advisory system has been of vital importance during the pandemic. The main challenge that robo-advisory service is currently facing is the design of platforms, which has limited its ability to offer complete personalization to investors. Overcoming this challenge will attract loads of investors to this ever-expanding industry.

About the Author(s)

Princy A. J

Princy holds a bachelor’s degree in Civil Engineering from the prestigious Tamil Nadu Dr. M.G.R. University at Chennai, India. After a successful academic record, she pursued her passion for writing. A thorough professional and enthusiastic writer, she enjoys writing on various categories and advancements in the global industries. She plays an instrumental role in writing about current updates, news, blogs, and trends.