Robo-advisors are automated algorithms that are used to assist in financial management and beyond. Total assets under management in the robo-advisors reach US$2.76tn in 2023. Those assets are expected to show an annual growth rate of 14%. That means people trust robo-advisors with bigger amounts of money. As robo-advisors gain more popularity, and become a trend in the fintech world, they’re gradually replacing personal human financial advisors here and there.
At Elinext, we have been developing financial apps for 10+ years, and we can’t afford to overlook technologies that are trending in the financial world. That’s why we decided to explore robo-advisors in detail in our blog. In this article, we explore the impact robo-advisors currently have in the fintech industry, figure out the top players in the market, and highlight the main features found in fintech apps with these solutions.
What Is a “Robo-Advisor” and How Does It Work
Robo-advisors are a technology that uses an algorithm after putting in the initial data about investors’ goals, preferences, and willingness to take risks to help them make smart choices when picking investments.
The algorithms can be used to show an immediate profit with higher risks of picking a “dark horse” that is about to be on the rise or spreading the investment across multiple companies and stretching it over time aiming for average returns in the market. Big Data and AI made robo-advisors more effective in comparison with their human counterparts, but it’s too early to say that human advisors are out of the equation.
Let’s have a closer look at how this thing stands in comparison with traditional human advisors.
Robo-Advisors: Pros and Cons
Human advisors aren’t going anywhere as algorithms, as reliable as they could be, aren’t still in the phase of perfection. However, they have a certain set of advantages over hiring a professional investment council.
Pros
Affordability
Affordability is a major advantage of using a digital advisor. The annual fees for robo-advisors are usually about one-third or even less compared to what a personal wealth manager would charge. This amounts to around 0.2-0.4% of a client’s balance.
24/7 availability and real-time adjustments
Robo advisors provide real-time analytics and advice, which is something beyond human capabilities. Human advisors just cannot monitor the markets 24/7 or provide instant advice to all clients simultaneously. Robo-advisors are available 24/7, they react to a slight change in the market much quicker and more effectively, and their recommendations are re-built in an instant.
Emotionless
Robo-advisors are not influenced by our emotions, which is important in the world of finance. Emotions can often lead to poor investment decisions.
Everything’s documented
Using robo-advisors makes the process of keeping all documentation intact much simpler because all the advice is provided through a mobile app, making it fully documented and easily accessible.
Cons
We could list a lack of flexibility when it comes to unorthodox decisions here. As well as the absence of personalization and empathy. In some cases, human advisors would be preferable as robo-advisors have these drawbacks.
Limited Personalization
Human advisors can bring up individual preferences, consider unique financial situations, and come out with tailored individual decisions. Robo-advisors in fintech rely solely on algorithms that exclude the possibility of a personalized approach.
Potential for Errors
Where there are algorithms, there’s always the possibility of fallacy. Algorithms aren’t error-prone, and sometimes there are events on the market that algorithms can’t deal with. Human insiders with critical thinking adjust their investment strategies to changing market conditions better.
Data Security
Robo-advisors require access to sensitive financial and personal information to function effectively. This raises concerns about data security and privacy.
All the possible breaches in the system expose users’ sensitive information to the intruders which may lead to identity theft, fraud, and other unpleasant consequences.
Lack of Responsibility
Users should not forget that the responsibility for investments and outcomes is entirely on their shoulders. If human advisors can be held accountable for their advice, robo-advisors can not. Users can’t argue and complain with robo-advisors: the software can’t be held accountable.
This leads us to the next point.
Low Level of Trust
Some investors may find it challenging to trust a machine with their financial future, especially during times of market uncertainty. Building trust with a robo-advisor can be more challenging compared to human advisors who can establish personal relationships and provide face-to-face interactions.
There are two sides to this idea. Some users may find robo-advisors to be a convenient and cost-effective solution, while others may prefer the personalized touch and emotional support provided by human financial advisors.
Types of Robo-Advisors
To continue talking about robo-advisors, we must categorize the solutions that are out there on the market. In the customer-oriented segment, there are:
- Fully automated robo-advisors (human assistance only in cases of tech errors)
- Hybrid models (human assistance provide personalized support)
As for service models, one of three will be executed by your robo-advisor:
- The discretionary model (robo-advisor executeы trades for a customer, full automation)
- The active advisory model (a customer receives suggestions but trades)
- The passive advisor (no instructions, just availability of the trading advice in a dedicated section of the app)
Professional-oriented robo-advisors serve as investments to help wealth managers and require more knowledge and more complex functionality.
Popular Robo-Advisor Apps Overview and Analytics
Betterment
Betterment is a registered investment advisor with the US Securities and Exchange Commission (SEC). It operates under strict regulatory guidelines to ensure investor protection and compliance with financial regulations.
The company was founded back in 2008. As for the robo-advisor platform, it started operating in 2010. As for the moment, it also operates as a budget-keeping app, with the help of which users are able to control their finances, bills, and taxes.
Wealthfront
Wealthfront is one of the leading robo-advisor platforms and is often considered a direct competitor to Betterment. It offers similar services, including automated investment management and personalized portfolios.
Robinhood
It is a popular commission-free trading platform, that introduced its robo-advisor service called Robinhood Invest. It allows users to invest in Exchange-Traded Funds (ETFs) and offers automated portfolio management.
Developing Robo-Advisor for a Fintech App
Let’s assume you want to jump on the bandwagon of developing a robo-advisor software to offer it to your clients and compete with the “big boys” we’ve mentioned in the previous section of the article. You have to understand who’s going to be using your robo-advisor software to choose what features and functions should your future software have to be competitive.
Determine Who Your Customers Are
The more customer data collected, the better, the robo-advisor will get your goals. In the beginning, every user has to answer a series of questions, where he/she would voice away info about their demography, investment goals, and preferences in the investment world.
As one progresses using the app, it collects data about past decisions in investments, and credit scoring, it might have the ability to analyze the social media of account owners to have a more complete picture. The questionnaire is helpful in the beginning, but building up other features helps in better investments for a particular individual in the future.
Investing With Higher or Lower Risk Depending on The Personality
The more detailed the info used by a robo-advisor algorithm, the more accurate and personalized tips you’d be getting. Those who are aiming for higher expectations would be more prone to invest in endeavors connected with above-average risk-taking, and those aiming for “the safe bet” will dive for “slow and steady” investments to make.
Looking at customers’ ages, preferences, and thousands of other little details, robo-advisors create an optimal investment strategy. Those who invest in such categories as “retirement” would gladly go for lower risks to avoid any stress, while high-risk takers would gladly boost their adrenaline levels for a potentially high reward.
Modern solutions designed by experienced custom software developers allow allocating means according to the personality of investors.
Re-allocation of Means Due To Outside Factors
Robo-advisors are able to predict clients’ investment performance after stats analysis and thoroughly digging into the market situation, which should suggest rebalancing means from one type of investment to another.
Timely portfolio rebalances are important. Also, when conducting a rebalance, it is crucial to strike a balance between minimizing the number of operations and aligning with the investor’s profile and return level expectations.
Automated Purchases Allowed
Many investors want to operate every month or do it at regular intervals, so robo-advisors should help with routine purchases and allocate the new means to the investor’s portfolio. Automatic investment plans are quite popular. Whether the robot allocates the money itself or only sends it to the clients to confirm, automated purchases should be allowed.
Series of Other Functions
AI advisors are pretty good at optimizing taxes and preparing documents for insurance companies. Algorithms will build a tax-paying strategy for US citizens in no time at practically no cost and prepare the necessary documents for insurance claims. At least, that’s what the reasonable functions included in the robotic advisor software should look like.
Summing up
Robo-advisors is a young software that started gaining popularity in the light of becoming a reasonable alternative to human wellness allocation experts.
Fintech startups and progressive traditional banks aren’t afraid to integrate robo-advisors into their everyday operation. Robo-advisors are the best choice for individuals who don’t have deep investment knowledge and a big money package to start investing with.
Robo-advisor’s integration into the investment or trading app is gradually becoming an essential feature. If you want to work on your platform or a mobile app, let professionals from Elinext give you a free quote and help you weigh your options on the market.
According to Delloite, by the year 2025, $16.0 trillion of investment assets are expected to be managed with the help of robo-advisors. Feels like a good time to enter the lucrative market while the figures are not as impressive but still huge.
