The Potential of Robo-Advisors

May 18, 2017

Robo advisors are platforms that use algorithms to manage users’ investment platforms. And they are threatening to upend the enormous global wealth management industry. A robo-advisor is an automated online tool that provides investment solutions, money management services and portfolio management to traders and institutional investors. More sophisticated robo-advisors are also capable of executing trades and minimizing taxes.

About Digital Advisers/ Robo Advisers

Digital advisors incorporate computer-based technology into their portfolio management processes – primarily through the use of algorithms designed to optimize various elements of wealth management from asset allocation, to tax management, to product selection and trade execution. Digital advice is not all the same, with many digital advisors pursuing different business models and investment philosophies, as well as offering varying degrees of sophistication in the services provided. The role of human involvement within digital advisors also varies based on the business model and the precise services provided.

Sophistication across digital advisors

(i)           customization,

Customization Some digital advisors place investors into one of several predetermined asset allocation mixes. Based on the information provided by the client, digital advisors will select the appropriate asset allocation mix for the individual. Other digital advisors will provide more customization or bespoke solutions. For example, some digital advisors will optimize a client’s existing portfolios to their specific investment horizon and risk tolerance.

(ii)          tax management,

Tax Management some digital advisors offer tax management capabilities, while others do not. Increases tax efficiency while not impacting the risk profile or asset allocation of the portfolio. Digital advisors have made it possible to implement this strategy even across small accounts.

(iii)         human intervention/oversight, and

Human Intervention / Oversight Digital advice models have the ability to help human advisors more effectively provide advice and automate routine processes. That said, digital advisors have a fundamental obligation to oversee their systems and mitigate risks associated with digital processes.

 Beyond investment management

Robo-advice powered by technology diminishes the barriers for market entry to a range of whole new types of players. Robo-advising is not a proprietary breakthrough for investment management, it is a chance for a range of industries to leverage the power of machines in order to jump to the next level of customer service.

With the pace of improvement that AI, machine learning and overall technology goes through, robo-advice has the potential to become highly personalized and specific over time, meeting particular needs of different groups. Algorithms don’t have an affluence towards a particular task like fund allocation; the very idea here is that automated advice can get to the point where it can be tailored to analyze any stream of data by demand and become a highly personalized personal assistant in anything.

Application of how Robots ub the financial industry

  • Bank of Tokyo-Mitsubishi UFJ took a first step toward employing non-human staff in April, with the introduction of a customer service humanoid robot at its flagship Tokyo outlet.  The Robot lasts 12 hours between charges, costs approximately $8,000 and can remember details from more than 5.5 million customers and over 100 different products. While there are limits to Nao’s capabilities (currently), this is both cheaper and more product conversant than any human in the same role.
  • FutureAdvisor: offers a robust investment evaluation tool. Users can connect their existing investment accounts to FutureAdvisor’s tool for free. FutureAdvisor then evaluates the investments based on performance, diversification, fees, and taxes.
  • Blooom: Unique among robo advisors, Blooom helps investors manage 401(k) retirement accounts. This presents two significant challenges. First, the service must be able to work with countless firms managing 401(k) retirement accounts. Second, it must be able to work with the investment options available in each 401(k). Blooom has managed to overcome both challenges.
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