Robo-advisory is a rapidly growing area of fintech (financial technology) that uses algorithms and software to provide investment advice and manage portfolios with little to no human intervention. These digital investment platforms are designed to make investing more accessible and less costly for individual investors. They typically use a questionnaire or other form of data collection to determine an investor’s risk tolerance, investment goals, and other factors. Then they create a personalized investment portfolio and execute trades based on market conditions and a set of pre-programmed rules.
The robo-advisory industry has grown significantly in recent years, with many established financial institutions and start-ups offering robo-advisory services. According to a report by A.T. Kearney, the global assets under management (AUM) in the robo-advisory market are projected to grow from $8 trillion in 2020 to $16 trillion by 2025. The same report predicts that robo-advisory platforms will account for 10% of all AUM globally by 2020.
The growing popularity of robo-advisory can be attributed to a number of factors, such as the increasing access to technology and the internet, the rise of passive investing, and the desire for lower-cost investment options. Additionally, the ongoing shift towards digital channels for financial services has also contributed to the growth of robo-advisory. As technology continues to evolve, robo-advisory platforms are also evolving and becoming more sophisticated, with the inclusion of new features such as human advisor integration, and mobile apps, making them an even more attractive option for investors.
How robo-advisors work
Robo-advisors work by using algorithms and software to provide investment advice and manage portfolios with little to no human intervention. They typically follow these steps:
Data collection: Robo-advisors gather data from clients by using questionnaires, surveys, or other forms of data collection to determine an investor’s risk tolerance, investment goals, time horizon, and other factors.
Portfolio creation: Based on the data collected, the robo-advisor uses algorithms to create a personalized investment portfolio for the client. The portfolio may consist of a mix of exchange-traded funds (ETFs), bonds, and other types of assets that are designed to align with the client’s risk tolerance and investment goals.
Investment management: Once the portfolio is created, the robo-advisor automatically executes trades based on pre-set criteria and a set of rules. This can include diversifying assets and adjusting the portfolio as needed to meet the client’s goals and risk tolerance. They may also use tools like re-balancing and tax-loss harvesting to optimize returns.
Monitoring and reporting: Robo-advisors continuously monitor the performance of the portfolios and provide clients with regular reports and performance updates. Clients can access their portfolios and track the performance of their investments in real time through a web or mobile application.
Human support: Many robo-advisory platforms offer human support for clients who have questions or need assistance. This can include email support or the option to schedule a call with a financial advisor.
The main advantage of using robo-advisors is the low cost and time-efficient way to access professional investment advice and portfolio management. Furthermore, the automation of portfolio management tasks, such as rebalancing, helps to ensure that the portfolio is managed according to the investor’s objectives and risk tolerance, reducing the likelihood of emotional decision-making. Additionally, by using algorithms and software, robo-advisors have the capability to process large amounts of data and perform complex calculations quickly, which can help identify opportunities and risks in the market.
Other areas of fintech impacting the future of investing
There are several other areas of fintech that are impacting the future of investing:
Social trading platforms: These platforms allow investors to copy the trades of successful investors, also known as “mirror trading” or “copy trading”. They can help inexperienced investors to benefit from the knowledge and experience of more successful traders.
Cryptocurrency and blockchain technology: Cryptocurrencies such as Bitcoin and Ethereum, and the underlying blockchain technology, have the potential to revolutionize the way assets are traded and settled. Blockchain technology offers the potential for faster, cheaper, and more secure transactions, and could have implications for everything from stock trading to real estate.
Artificial intelligence and machine learning: These technologies are being used to analyze market data and make predictions about future performance. Some companies are using AI and machine learning to create predictive models to identify trends in the market and make better investment decisions.
Alternative lending platforms: These platforms connect borrowers and lenders directly, bypassing traditional banks and financial institutions. They are helping to democratize access to credit, especially for small businesses and individuals who may not have access to traditional forms of financing.
Insurtech: The insurance industry is also impacted by fintech, Insurtech companies are using data and analytics to improve underwriting and pricing. Also, new distribution channels such as mobile apps and digital platforms make it easier for clients to purchase and manage policies.
All these areas of fintech are creating new opportunities and challenges for investors, and are likely to continue shaping the future of investing in the coming years.
Challenges and opportunities for investors in a fintech-driven future
As fintech continues to evolve and shape the future of investing, it presents a number of challenges and opportunities for investors.
Increased competition: With the emergence of new fintech companies, investors may face increased competition from new and innovative investment options, which could make it more difficult for established players to retain market share.
New Risks: Fintech companies often operate in a regulatory grey area, which can make it difficult for investors to assess the risk associated with new fintech investments. Additionally, the fast-paced nature of the fintech industry can make it hard to keep up with changes and new developments in the sector.
Cybersecurity: Many fintech platforms involve the handling and storage of sensitive financial data, which makes them an attractive target for hackers and cybercriminals. This presents an increased risk for investors, as a security breach could result in the loss of personal financial information.
New investment options: Fintech is creating new investment opportunities that were not previously available. For example, the emergence of robo-advisors has made it possible for individual investors to access professional investment advice and portfolio management at a fraction of the cost.
Increased accessibility: Fintech is making it possible for a broader range of individuals to access financial services, which can help to increase financial inclusion. This can also help to democratize access to investment opportunities that were previously only available to a select few.
Innovation and Automation: Fintech companies are leveraging cutting-edge technologies, such as artificial intelligence and blockchain, to create new and more efficient ways of investing. This can lead to cost savings and new investment opportunities.
Improved data-driven decision making: By using advanced analytics and big data, investors can gain insights into the market, identify trends and make data-driven decisions that can help to improve investment outcomes.
Overall, fintech is opening up new opportunities for investors and helping to democratize access to financial services and investment opportunities, However, it also brings new risks and challenges and requires investors to stay informed about regulatory changes and new developments in the sector, so as to make informed investment decisions.
Fintech, or financial technology, is revolutionizing the way we invest and manage our money, through the automation and digitalization of financial services. Robo-advisory is a growing area of fintech that uses algorithms and software to provide investment advice and manage portfolios with little to no human intervention. The increasing popularity of robo-advisory can be attributed to a number of factors, such as the increasing access to technology and the internet, the rise of passive investing, and the desire for lower-cost investment options.
Other areas of fintech, such as social trading platforms, cryptocurrency, blockchain technology, artificial intelligence, machine learning, and alternative lending platforms, are also impacting the future of investing, bringing new opportunities and challenges.
Fintech companies are leveraging cutting-edge technologies to create new and more efficient ways of investing and make it possible for a broader range of individuals to access financial services and investment opportunities. However, as technology continues to evolve, fintech also presents new risks, such as increased competition, new regulatory challenges, and cybersecurity threats. As an investor, it’s important to stay informed about regulatory changes and new developments in the sector so as to make informed investment decisions.