Robo-advisors: A boon or a bane for investors?
Robo advisors are the inevitable next step in the evolution of financial planning and investing.
Robo-advisor is a digital financial platform that furnishes automated, mathematical algorithm-driven financial advice along with investment management services that include minimal human intervention. Initially, this technological innovation was applied to automate and optimise passive index strategies based on the modern portfolio theory. Robo-advisors have evolved from there.
Today, a typical robo-advisor asks questions about an investor’s financial situation, risk appetite, and future financial goals via an online survey. It then uses the data to offer advice and automatically invest on behalf of the investor. The software uses complex algorithms to manage and allocate client assets in the most efficient way possible.
Robo-advisors provide a wide array of bias-free traditional investment management services at relatively lower fees than human financial advisors. They require low amounts of minimum opening balances, making them economically viable for retail investors. Robo-advisors also add value by allowing users to easily invest in a diverse range of asset classes conveniently through the web or mobile applications. Additionally, they offer full access to portfolio management tools, which leads to more flexibility as well as higher security.
However, they lack the subjectivity required to offer fully-personalised services and are not suitable for complex issues such as estate planning. In recent years, the robo-advisory segment of the industry has experienced phenomenal growth.
Client assets managed by robo-advisors reached nearly USD 1 trillion in 2020. As per Statista, assets under management (AUM) in the robo-advisors segment are projected to reach USD 1.66 trillion in 2022. AUM is expected to show an annual growth rate (CAGR 2022-2026) of 15.20 per cent, resulting in a projected amount of USD 2.92 trillion by 2026. In 2021, the largest robo-advisor in terms of assets was Vanguard Personal Advisor Services with USD 231 billion in AUM. Robo advisors are the inevitable next step in the evolution of financial planning and investing.