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The expansion of robo-advisory in wealth management

Not long ago, robots were just a thing for sci-fi novels and movies. But now, we can see them in almost every sector, and wealth management is no exception. During the financial crisis of 2008, when the investment rates touched almost zero, a new phenomenon appeared — robo-advisory. These digital platforms that, as the name […]

Not long ago, robots were just a thing for sci-fi novels and movies. But now, we can see them in almost every sector, and wealth management is no exception. During the financial crisis of 2008, when the rates touched almost zero, a new phenomenon appeared — robo-advisory. These digital platforms that, as the name suggests, use and can provide some wealth management advice about financial planning; they don't need any human intervention to do it. When the crisis happened, the small investors had a cash surplus after pulling money out of equities. Back then, the leading firm in robo-advisory was Betterment, and they took advantage of the situation by encouraging the use of algorithm-driven portfolios. They argued that the robo-advisors would make little to no mistakes, and you would avoid the human factor. It was perfect in the given moment since it allowed them to keep their business running even when some layoffs were necessary because of the global situation. Many other companies noticed that, and the term robo-advisory suddenly became a buzzword, and big players also launched such services. However, people have had some reservations about using robo-advisors because of a couple of reasons — they are not sure how much they can trust them, and some investors still prefer to have a human touch with the people handling their money. With the rise of the use of AI in all industries, people have started to trust robo-advisory more and more. This, of course, leads to the expansion of the use of this product in the wealth management sector. 

Robo-advisors are programmed to do what a regular human advisor would, but they do it better in most cases and certainly do it faster. Based on pre-requirements, they will evaluate the investor's needs and wants and propose a suitable investment strategy. Once the investor decides where to put their money, the funds will be allocated, and the robo-advisor will monitor the results constantly. Based on the set goals, it will also rebalance the funds accordingly. The main benefit of this service is that the setup is very easy. Once you set your goals, the robo-advisor will do everything possible to achieve them without trying to sell you something additional or ask you constantly for more money. All of the firms that offer this service as part of their portfolio guarantee excellent security and fantastic customer service in case of questions or issues. And they won't leave you hanging in the beginning until you learn how to work with a robo-advisor — they will provide you with extensive training. The robo-advisor will offer you different services depending on the company, but sometimes even tax-loss harvesting or retirement planning are included. You can notice immediately when starting to use this service that it can monitor much more investments than a human would be able to. However, robo-advisors have their limitations, like working in volatile markets or handling deep disruptions in the market. Of course, AIs are getting smarter, and soon this wouldn't be an issue, but until then, you should keep this in mind.

The expansion of robo-advisory in wealth management - 1

Pros and cons of robo-advisory


The three main pros of using robo-advisory are:

  • They are very simple to use, and everything is very transparent — Since no human is involved, you can be sure that all the advice you will get is completely unbiased.  Also, you will be able to get details that are usually not provided by human advisors just because they might not even check things that deep or consider it not important to share them with you. On top of that, you can be 100% that all rules and regulations are followed.
  • Addressing underserved markets — Bigger companies focus their efforts only on bigger markets that they consider better. However, with robo-advisors, this is different since they can easier monitor and evaluate underserved markets and propose your investments there. The benefit of that is that those markets have low fees, and usually, there is no minimum investment value required. Those markets are perfect for people with smaller budgets or those that are just starting with wealth management.
  • They are very convenient and easily accessible — Since everything is digital and the robo-advisor is an online service, you can access such service anywhere. Also, everything will be in real-time because the robo-advisor can monitor everything and check your investment status all the time. 


The three main cons of using robo-advisory are:

  • During downturns, there are no handholds — Usually, with human advisors, you can easily go for a handhold during downturns because the human will be able to intervene. However, when the market is not stable, robo-advisors don't handle it that well. When the market is bullish, and the conditions are changing quite quickly, they won't be able to react as well as a human. 
  • Lack of personalization — Robo-advisors can personalize the proposals for investment strategy, but the robo-advisor itself can't be personalized so that everyone will get the same interface and interaction flow. However, the advancement of AI and deep learning can bring more personalization into the operation and interaction. 
  • Algorithms are hard to be updated — When the market changes very quickly is hard to keep the algorithm that the robo-advisor uses up to date. So, to make decisions, the robo-advisor must calculate many factors, examine different markets, etc. However, if this data is not updated on time or something in the algorithm needs to be manually adjusted, this might not give you a quick enough turnaround time.

Future of robo-advisory

Surely we have a lot more to see from robo-advisors. This service will focus on improvement for all the companies that offer it. The algorithms will be improved to calculate better different markets and extraordinary conditions to give better recommendations. Also, the personalization options will be extended so that everyone will get a bit of human touch and better-improved interactions with their robo-advisor. Of course, the good parts will also be further improved, like exploring and working with underserved markets or using simplicity. Soon, more and more people will start using robo-advisors in investment and wealth management. 

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Gabriela Gavrailova
Gabriela Gavrailova
Gabriela is a freelance news editor at Tech Edition, where she writes about technology and often does listicles and product reviews. Based in Austria, Gabriela is a person with many and diverse hobbies. If you don't find her reading a book at home or baking something, she will probably be out hiking or taking some classes to learn a new skill.

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