Robo-advisors orrobo-advisers arefinancial advisers that provide personalized financial advice andinvestment management online with moderate to minimal human intervention.[1] A robo-advisor provides digital financial advice based on mathematical rules or algorithms. These algorithms are designed by human financial advisors, investment managers and data scientists, and coded in software by programmers. These algorithms are executed by software and do not require a human advisor to impart financial advice to a client. The software utilizes its algorithms to automatically allocate, manage and optimize clients' assets for either short-run or long-run investment.[2]
Robo-advisors are categorized based on the extent of personalization, discretion, involvement, and human interaction.[3] There are over 100 robo-advisory services.[4][5] Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience at a lower cost than traditional human advice.[6] Robo-advisors collect financial situation information from the client to determine risk tolerance. Then, robo-advisors allocate a client's assets on the basis of risk preferences and desired target return.[7] While robo-advisors have the capability of allocating client assets in many investment products such asstocks,bonds, futures, commodities, and real estate, the advice is often directed towardsexchange-traded funds.[4] Clients can choose between offerings withpassive asset allocation techniques oractive asset management styles.[4]
The first robo-advisorBetterment was launched in 2010 as a direct-to-consumer model byJon Stein.[8] Thereafter, robo-advisors increased in popularity.[9] Before robo-advisers, online portfolio management interfaces existed since the early 2000s and these interfaces were used by financial managers to manage and balance clients' assets. By the end of 2015, robo-advisers from almost 100 companies around the globe were managing $60 billion in assets of clients.[10]
In 2015,Hong Kong based 8 Securities launched one ofAsia's first robo-advisors inJapan,[11] followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi.[12] In 2017, Singapore basedStashAway received a capital markets services license from theMonetary Authority of Singapore.[13]
A robo-advisor can be defined as "a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms". Some robo-advisors do have an element of human interference and supervision.
Legally, the term "financial advisor" applies to any entity giving financial advice. Most robo-advisor services are instead limited to providing portfolio management,[14] that is the allocation of 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.[citation needed] Robo advisors provide "personal financial advice" in addition to "general financial advice". Personal financial advice is tailored to the financial situation and goals of the client, and is in their best interests. General financial advice doesn't take into account the personal situation or goals of the client, or how it might affect them personally.[15]
Other designations for thefinancial technology companies that program robo advisor software include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor".[16]
An investment platform, even if it provides automated service, cannot be termed as a robo advisor if it does not provide personalised investment advice.
While robo-advisors are most common in theUnited States, they are also present inGermany,[4]Australia,[17]India,[18]Canada,[19] andSingapore.[20]
Robo-advisors are extending into different aspects of financial advice, such as advising retail customers on how much money to spend versus save, how to plan for retirement and decumulation (selling off securities over time),[3] andtax loss harvesting.
The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession.[21]
Theportfolios that robo-advisors offer are typicallyexchange-traded funds, but some offer portfolios of individualstocks.[2][22] Typically they employmodern portfolio theory, which minimizes risk for a given expected return. Some are designed for use withsocially responsible investing,Halal investing, or strategies similar tohedge funds.
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.[23] The average financial planner has a minimum investment amount of $50,000,[24] while minimum investment amounts for robo-advisors start as low as $500 in the United States[25] and as low as £1 in theUnited Kingdom.[26] In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2 percent to 1.0 percent of Assets Under Management,[27] while traditional financial planners charged average fees of 1.35 percent of Assets Under Management, according to a survey conducted by AdvisoryHQ News.[24]
In the United States, robo-advisors must beregistered investment advisors, which are regulated by theSecurities and Exchange Commission.[28] In theUnited Kingdom they are regulated by theFinancial Conduct Authority.
Robo advisors that manage client money offer discretionary accounts for the clients. This sets them apart from micro investing firms, managed funds and investing platforms. In Australia, the robo-advisors manage the client money through theManaged Discretionary Account (MDA) structure.
The following are the largest robo-advisors by assets under management:[29]
| Company | Country | Assets under management | Clients |
|---|---|---|---|
| The Vanguard Group | U.S. | $206.6 billion | 1,100,000 |
| Wealthfront | U.S. | $75.0 billion | 1,000,000 |
| Charles Schwab | U.S. | $65.8 billion | 262,000 |
| Betterment | U.S. | $26.8 billion | 615,000 |
| Personal Capital | U.S. | $16.1 billion | 26,000 |
