Robo-Advisory: Transforming Wealth Management with AI

By Techfunnel Author - Published on October 31, 2023
The article is about Robo Advisory

Until recently, widespread access to investing in the stock market was not available to many. For decades, investors needed to engage a broker to buy and sell securities or to obtain the latest stock quotes. Financial technology (FinTech) has revolutionized this scenario, making it easier than ever for virtually anyone to build and accumulate wealth through online trading applications and robo-advisors.

According to a Deloitte report(1), by 2025, robo-advisors will manage over $16 trillion in investments. While this technology is still relatively nascent, understanding precisely what a robo-advisor is and how it operates is crucial to capitalize on this burgeoning opportunity in the FinTech space.

What is Robo-advisory?

In the FinTech realm, robo-advisory refers to automated solutions that assist with financial management, utilizing artificial intelligence (AI) and machine learning (ML) technologies alongside traditional statistical algorithms. Robo-advisory is often categorized under a specific FinTech niche known as WealthTech.

The user journey typically begins with consumers completing comprehensive online questionnaires about their financial goals, risk tolerance, and investment expectations. Robo-advisors(2) utilize sophisticated algorithms to determine an asset allocation that aligns with the client’s needs, managing the portfolio by rebalancing it, executing transactions, and performing tax-loss harvesting, among other actions, which saves time, minimizes risk, and can potentially lead to higher returns.

How Robo-Advisory Works?

Robo-advisors use algorithms to identify and predict investors’ preferences, risks, and desired outcomes, typically through a series of psychographic or demographic questions, resulting in a sample portfolio. Basic robo-advisors utilize this data to develop the investor profile, while more advanced robo-advisors employ AI and third-party data to gather deeper insights, using financial transactions to fully comprehend the investor’s actual financial behavior.

These holistic robo-advisors can capture a clear picture of what individuals actually do and need, revealing details users might not be aware of and guiding them toward informed financial decisions.

4 Key Characteristics of Robo-Advisories

A robo-advisor is:

  • Available 24/7:

    Leveraging cloud technology, they are accessible at all times.

  • Affordable:

    The absence of human interaction significantly reduces fees compared to traditional advisors.

  • Transparent:

    They provide clear insights into fees, transactions, portfolios, etc., and offer straightforward tracking options.

  • User-Focused:

    Their simple and intuitive design ensures a user-friendly experience.

4 Types of Robo Advisors

Robo-advisors can be classified into:

  1. Full-service robo-advisors:

    These manage various aspects of diverse investments, utilizing AI and intelligent automation to execute both strategic and operational facets of wealth management.

  2. Half-service robo-advisory:

    Limited to suggesting investment products, it supports human decision-making but doesn’t provide clear, specific guidance for portfolio development.

  3. Self-service robo-advisory:

    Solely providing investment advice, this type is often offered by traditional financial institutions and banks newly venturing into FinTech.

  4. Hybrid robo-advisory:

    Combining automated algorithms with human financial advisors, it manages portfolios automatically while also offering personalized advice through human interaction.

4 Benefits of Using a Robo-Advisory

Robo-advisory FinTech solutions are popular due to several benefits:

  1. Greater Accessibility:

    They are easy to use, affordable, and more accessible than traditional human wealth management advisors.

  2. Holistic Financial Management:

    Offering a range of financial planning services, they can oversee portfolios, ensure investment target achievement, and minimize liabilities on a single platform.

  3. Reduced Risk of Bias:

    AI-based robo-advisors use mathematical algorithms to evaluate investors, providing objective and unbiased assessments.

  4. Facilitated Goal Setting and Management:

    They create investment objectives based on user profiles, prompting intelligent future-focused decisions.

Challenges with Robo-Advisors

While robo-advisors are excellent entry-level options for investors with smaller accounts and limited investment experience, professional users might find them lacking, especially for services like estate planning, complex tax compliance, and trust fund management.

Automated services may also struggle to handle unexpected financial emergencies or unusual situations, and they assume users have specific goals and a solid understanding of their financial situation and potential investment outcomes.

Final Thought: Robo-Advisory or Not?

A robo-advisor is a digital platform that provides automated, algorithm-driven financial planning services with little to no human supervision. Since their introduction about a decade ago, over 100 robo-advisor options have become available.

They are particularly popular among users unfamiliar with financial products and investments, as most robo-advisory solutions have reasonable starting deposits and do not require in-depth market knowledge.

A recent survey(3) indicated that acceptance of digital advisors increases with each successive generation, suggesting that as FinTech matures, robo-advisory – and the WealthTech segment – could become a significant growth area for the industry.

Techfunnel Author | is an ambitious publication dedicated to the evolving landscape of marketing and technology in business and in life. We are dedicated to sharing unbiased information, research, and expert commentary that helps executives and professionals stay on top of the rapidly evolving marketplace, leverage technology for productivity, and add value to their knowledge base.

Techfunnel Author | is an ambitious publication dedicated to the evolving landscape of marketing and technology in business and in life. We are dedicate...

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