Robo-advisors or robo-advisers are

financial adviser A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...

s that provide personalized financial advice and

investment management Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...

online with moderate to minimal human intervention. A robo-advisor provides digital financial advice that is personalised 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.D'Acunto, Francesco & Prabhala, N. & Rossi, Alberto G. (2019)
"The Promises and Pitfalls of Robo-Advising" Review of Financial Studies
/ref> Robo-advisors are categorized based on the extent of personalization, discretion, involvement, and human interaction.D'Acunto, Francesco & Rossi, Alberto G. (2020)
"Robo-Advising." Available at SSRN
/ref> 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 at a lower cost than traditional human advice. 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. While robo-advisors have the capability of allocating client assets in many investment products such as

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, bonds, futures, commodities, and real estate, the advice is often directed towards

exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or comm ...

s. Clients can choose between offerings with

passive Passive may refer to: * Passive voice, a grammatical voice common in many languages, see also Pseudopassive * Passive language, a language from which an interpreter works * Passivity (behavior), the condition of submitting to the influence of ...

asset allocation techniques or active asset management styles. Robo-advisors that provide investment management service create a discretionary managed account for each of its clients.

History

The first robo-advisor

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was launched in 2010 as a direct-to-consumer model by Jon Stein, followed in 2011 by Wealthfront. Thereafter, robo-advisors increased in popularity. 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, several robo-advisers from around the globe were managing $60 billion in assets of clients. In 2012, MoneyFarm was launched in Italy. In 2013, Nutmeg was launched in the United Kingdom. In 2014, Stockspot was launched in Australia, followed there in 2015 by QuietGrowth. In 2015, 8 Securities launched one of Asia's first robo-advisors in Japan, followed there in 2016 by Money Design, Co., under the brand name THEO, and WealthNavi. In 2017, Singapore based StashAway received a capital markets services license from the

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Definition

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 A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...

" applies to any entity giving personalized financial advice. Most robo-advisor services are instead limited to providing discretionary portfolio management, 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. 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. Other designations for the

financial technology Financial technology (abbreviated as fintech) refers to the application of innovative technologies to products and services in the financial industry. This broad term encompasses a wide array of technological advancements in financial services, ...

companies that program robo advisor software include "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor". An investment platform, even if it provides automated service, cannot be termed as a robo advisor if it does not provide personalised investment advice.

Areas served

While robo-advisors are most common in the

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, they are also present in

Germany Germany, officially the Federal Republic of Germany, is a country in Central Europe. It lies between the Baltic Sea and the North Sea to the north and the Alps to the south. Its sixteen States of Germany, constituent states have a total popu ...

Australia Australia, officially the Commonwealth of Australia, is a country comprising mainland Australia, the mainland of the Australia (continent), Australian continent, the island of Tasmania and list of islands of Australia, numerous smaller isl ...

India India, officially the Republic of India, is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area; the List of countries by population (United Nations), most populous country since ...

Canada Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, making it the world's List of coun ...

, and

Singapore Singapore, officially the Republic of Singapore, is an island country and city-state in Southeast Asia. The country's territory comprises one main island, 63 satellite islands and islets, and one outlying islet. It is about one degree ...

. 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), and tax loss harvesting.

Methodology

The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession. The

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s that robo-advisors offer are typically

s, but some offer portfolios of individual

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s. Typically they employ

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, which minimizes risk for a given expected return. Some are designed for use with

socially responsible investing Socially responsible investing (SRI) is any investment strategy which seeks to consider financial return alongside ethical, social or environmental goals. The areas of concern recognized by SRI practitioners are often linked to environmental, ...

, Halal investing, or strategies similar to

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Consumer access

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. The 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

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. 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, while traditional financial planners charged average fees of 1.35 percent of Assets Under Management, according to a survey conducted by AdvisoryHQ News. At the same time, at the other end of the client spectrum,

high-net-worth individual In the financial services industry, a high-net-worth individual (HNWI) is a person who maintains liquid assets at or above a certain threshold. Typically the criterion is that the person's financial assets (excluding their primary residence) are ...

(HNI) investors are increasingly using robo-advisors.

Regulation

In the United States, robo-advisors must be registered investment advisors, which are regulated by the

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. In the

they are regulated by the

Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom. It operates independently of the UK Government and is financed by charging fees to members of the financial services industry. The FCA regulates financi ...

. 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 the Managed Discretionary Account (MDA) structure.

Total assets under management

The following are the largest robo-advisors by assets under management:

References

{{Investment-management * Online financial services companies Web applications Financial advisors