Robo-advisors or Robo-advisers are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms. These algorithms are executed by software and thus financial advice do not require a human advisor. The software utilizes its algorithms to automatically allocate, manage and optimize clients’ assets.
There are over 100 robo-advisory services. Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience with lower cost compared to traditional human advice. Robo-advisors typically allocate a client’s assets on the basis of risk preferences and desired target return. While robo-advisors have the capability of allocating client assets in many investment products such as stocks, bonds, futures, commodities, real estate, the funds are often directed towards ETF portfolios. Clients can choose between offerings with passive asset allocation techniques or active asset management styles.
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.Robo-advisors are extending into newer business avenues.
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 assetsThe average financial planner has a minimum investment amount of $50,000,while minimum investment amounts for robo-advisors start as low as $500 in the United States and as low as £1 in the United Kingdom In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2% to 1.0% of Assets Under Managemenwhile traditional financial planners charged average fees of 1.35% of Assets Under Management according to a survey conducted by AdvisoryHQ News.
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.
What are the biggest robo-advisor?
As of October 2017, robo-advisors had $224 billion in assets under management.
The following are the largest robo-advisors by assets under management:
|Company||Country||AUM (millions of US$)|
|The Vanguard Group||U.S.||83,000|
|Charles Schwab Corporation||U.S.||19,400|