Robo-advisor

Robo-advisors are a class of financial adviser that provides financial advice or portfolio management online with minimal human intervention.^[1]

Much of the focus has been on portfolio management. While their exact recommended portfolio allocations may vary,^[2] currently most robo-advisors employ algorithms such as Modern portfolio theory that originally served the traditional advisory community, which has used algorithmically-based automated investment solutions (dubbed in the industry as "rebalancing software") to conduct portfolio management since at least 2005.^[3]

Presence

While robo-advisors are most common in the United States, they are also present in Europe,^[4] Australia,^[5] India,^[6] and Canada.^[7]

Definition

Legally, the term "financial advisor" applies to any entity giving advice about securities. But most robo-advisors limit themselves to providing portfolio management (i.e. allocating 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.

Other designations for these financial technology companies include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor."

The earlier Robo-advisors included Betterment, Wealthfront, Schwab, Vanguard, and TradeKing, to name a few. The new generation Robo-advisors include Macroaxis, qplum, LifeStage Investing and Kavout.^[8]

Total assets under management

Collectively, robo-advisors directly managed about $19 billion as of December 2014, according to a study by Corporate Insight. This figure represents a 21 percent increase in assets under management since July, and a 65 percent increase since April.^[9] By 2020 the global assets under management of robo-advisers is forecast to grow to an estimated US$255bn, according to a research report by MyPrivateBanking Research.^[10] As of August 2015, Charles Schwab, Wealthfront and Betterment lead the pack in gathering assets regarding robo-advisors.^[11] In July 2016, Betterment's assets under management surpassed $5 billion, the first robo-advisor to do so.^[12]

Industry context

The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession. The main difference is in distribution channel. Until recently, portfolio management was almost exclusively conducted through human advisors and sold in a bundle with other services. Now, consumers have direct access to portfolio management tools, in the same way that they obtained access to brokerage houses like Charles Schwab and stock trading services with the advent of the Internet.^[13]

Robo-advisors are extending into newer business avenues. In June 2016, robo-advisor Wealthfront announced a partnership with the State of Nevada to offer a 529 college savings plan. This development comes during overall growth in the college savings marketplace.^[14]

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.^[15] The average financial planner has a minimum investment amount of $50,000,^[16] while minimum investment amounts for robo-advisors start as low as $500.^[17]

In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.14% to 0.5% of Assets Under Management, ^[18] while traditional financial planners charged average fees of 1.35% of Assets Under Management according to a survey conducted by AdvisoryHQ News.^[19]

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

References

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