What is a Robo-Advisor?
Investment is not an easy journey. The complexity of investment instruments, coupled with multiple investment offerings means a typical investor is faced with a maze to navigate when it comes to the decision-making process in terms of what investment options to consider, duration of the investment, risk analysis, types of investment portfolio and opportunities to consider.
Traditionally, investment advisors play a crucial role in helping prospective investors make decisions on investment options which can lead to optimum investment decisions. In a fast-growing digital age where innovations in the financial sector are the norm, coupled with the rise of emerging technologies, especially big data, artificial intelligence and machine learning have given birth to Robo-advisors.
A Robo-advisor can be described as a computer application that is based on an automated analytics processing system that combines algorithms, including machine learning, with big data to generate a wide range of automated financial recommendations and investment management services for retail investors.
Robo-advisors provide a helping hand to prospective investors with little or no human interventions. Through Robo-advisors, a typical retail investor can access investment advice and participate in the complex investment market without having to worry about paying for relatively expensive advice provided by human wealth managers. Robo-advisors are, therefore, democratising investment space by allowing prospective investors, especially retail investors, to have access to actionable insights which can guide their investment decision-making process and wealth management strategies.
Robo-advisor or automated investment advisory services provide advice on financial products based on several decision parameters; in this direction, an automated system is effectively replacing a human investment advisor. Investment tasks such as retirement planning, investing in stocks, bonds, contract brokering, portfolio management and wealth management are all automated through the deployment of Robo-advisors. One variant of Robo-advisor is known as white-label Robo-advisors, which can help clients navigate the investment world by providing them with tailor-made insights peculiar to their investment goals.
A Robo-advisor’s power is premised on its ability to provide high-value advisory services on how an investor can best do investment portfolio allocation and money management at low costs compared to traditional expensive advisory services offered by human wealth managers.
For example, Robo-advisors could be programmed to provide advice on the investment options to consider if one is planning to invest as part of his/her retirement financial planning.
More importantly, Robo-advisors can help deal with conflict of interest, which is widespread in the investment market, where a wealth manager may be looking after their interests by selling products and generating profits which may not necessarily align with the client’s interest; therefore, the advice given to the clients may be premised on their profit motives and not necessarily the best investment advice perse.
Another advantage Robo-advisors bring to the table is their ability to drastically lower the cost per relationship in terms of enabling individuals to benefit from advisory services.
Although the cost of utilising the service is relatively low from the perspective of an end-user, the cost of writing the computer code that powers Robo-advisors is prohibitive, meaning the cost of utilising Robo-advisors is not cheap; however, the prediction is that as more and more users make use of Robo-advisors, the fixed cost per client can reduce over time.
Robo-advisors are getting better at offering insights to clients; however, their underlying system is not perfect.
Therefore, some clients tend to utilise the hybrid model, which combines human advisors with sophisticated algorithms, ensuring that any weakness in Robo-advisors’ output can be smoothened out. Due to a high degree of automation built on a set of parameters, Robo- advisors cannot offer flexible investing options.
Robo-advisors are an example of how technology is fast outpacing the ability of regulators to introduce timely regulatory framework in the context of oversight FinTech innovations.
Some countries have put in place regulatory provisions to guide the operation of the Robo-advisory market; others are working towards putting in place such regulations. Other countries are providing regulatory sandboxes as the first step in ensuring they can develop a mechanism to provide oversight of the Robo-advisory industry over time.
In conclusion, Robo-advisor is still a relatively emerging technology and only represents a fraction of the overall financial advising market.
Despite this, however, Robo-Advisors are showing significant potential to disrupt the traditional investment value chain, creating new opportunities for persons who cannot afford expensive traditional financial advisors to participate in the investment market, thereby threatening the influence of established asset managers and investment bankers.
The writer is a Technology Innovations Consultant. E-mail: