Robo-Advisors - The Rise or the Fall?



Robo-Advisors - The Rise or the Fall?

With the young generation of investors entering the market, who want to test waters before making huge investments, we see a huge change in the way financial sector deals with its customers。 However, with such small investment funds, it becomes difficult for the financial institutions to allocate dedicated human advisors。 Hence today most of such firms use technology to not just cut cost but also attract young tech-savvy investors to try their hand in planning their RoI。

From allocating individual investment advisors to now leveraging robo-advisors, the sector is fast moving and adopting technology to ensure the customers themselves can manage their small investments。 The rise of robo-advisors is just the result of this shift。 The global robo-advisors industry is expected to reach $987。4 billion in 2020, growing at a CAGR of 19。3 percent (BuyShares)。 But what are robo-advisors and how does it function?

Defined as online platforms that use complex algorithms to create investment portfolios based on the information the client feeds in when signing up for an account, these robo-advisors are quite a hot cake among the financial institutions. Its array of benefits include low fees, small opening balance, and ease of use, which attracts entry-level investors. Statista’s data reveals that in 2019, assets under management in the robo-advisors segment amounted to $827.4 billion, an increase by 230 percent in the last three years, and the number of investors using robo-advisors will hit 436.3 million by 2024.

But How Effective is Robo-Advisory?

The first robo-advisor was launched in 2008 and started providing services in 2010, during the great global recession. Over the last decade, the technology has been tuned several times to fit the future needs of the financial sector. Though the predictions about its performance were quite bright, however, the growth is still quite skeptic. So what is slowing its growth?

Lack of trust could be a major reason for this sluggish growth as we as humans still trust humans more than machines when it comes to money. A survey by ING Mobile Banking revealed that around 91 percent of investors would not be comfortable having a machine handle their financial decisions. Though robo-advisors are highly used for small investments or by entry-level investors, people willing to make large investments still look towards a human-touch to their services, where no pre-fed algorithm makes the decision, but its actual brains that are put to work to analyze and calculate the risk & returns.

On the other hand, the robo-advisors have limitations to their functionality. They do exactly what they are asked to do, nothing more or less as they lack foresight and long-term planning skills, which human advisors are excellent at. While human advisors can provide ample of options to their clients looking at their future needs and returns they expect, robo-advisors are incapable of making educated guesses about what investments their clients should make to achieve their financial goals.

This limited service could be a reason why several firms still struggle to break-even with their investment in robo-advisors. Though there are new, more sophisticated and tech-heavy robo-advisors entering the market, the path to change is never linear but chaotic and messy. However, there is a segment of experts who believe that the robo-advisor industry is changing at lightning speed and will redefine the space.

Artificial intelligence is making its way into the robo-advisory industry, which will empower it to offer more diversified investment products, asset allocation or portfolio rebalancing。 On the other hand, there is a rise of hybrid robo-advisors, which includes digital investing with human advisors。 COVID-19 has indeed brought in a lucrative opportunity for this segment to grow as social distancing and less human interaction is here to stay for a while。 Till situation normalizes and as digitization progresses, the demand for robo-advisors will be on the rise as people will become more comfortable exploring and using the advanced robo-advisors。

What do you think? Will you give a try to robo-advisors to test your money?

With the young generation of investors entering the market, who want to test waters before making huge investments, we see a huge change in the way financial sector deals with its customers。 However, with such small investment funds, it becomes difficult for the financial institutions to allocate dedicated human advisors。 Hence today most of such firms use technology to not just cut cost but also attract young tech-savvy investors to try their hand in planning their RoI。

From allocating individual investment advisors to now leveraging robo-advisors, the sector is fast moving and adopting technology to ensure the customers themselves can manage their small investments. The rise of robo-advisors is just the result of this shift. The global robo-advisors industry is expected to reach $987.4 billion in 2020, growing at a CAGR of 19.3 percent (BuyShares). But what are robo-advisors and how does it function?

Defined as online platforms that use complex algorithms to create investment portfolios based on the information the client feeds in when signing up for an account, these robo-advisors are quite a hot cake among the financial institutions。 Its array of benefits include low fees, small opening balance, and ease of use, which attracts entry-level investors。 Statista’s data reveals that in 2019, assets under management in the robo-advisors segment amounted to $827。4 billion, an increase by 230 percent in the last three years, and the number of investors using robo-advisors will hit 436。3 million by 2024。

But How Effective is Robo-Advisory?

The first robo-advisor was launched in 2008 and started providing services in 2010, during the great global recession. Over the last decade, the technology has been tuned several times to fit the future needs of the financial sector. Though the predictions about its performance were quite bright, however, the growth is still quite skeptic. So what is slowing its growth?

Lack of trust could be a major reason for this sluggish growth as we as humans still trust humans more than machines when it comes to money。 A survey by ING Mobile Banking revealed that around 91 percent of investors would not be comfortable having a machine handle their financial decisions。 Though robo-advisors are highly used for small investments or by entry-level investors, people willing to make large investments still look towards a human-touch to their services, where no pre-fed algorithm makes the decision, but its actual brains that are put to work to analyze and calculate the risk & returns。

On the other hand, the robo-advisors have limitations to their functionality. They do exactly what they are asked to do, nothing more or less as they lack foresight and long-term planning skills, which human advisors are excellent at. While human advisors can provide ample of options to their clients looking at their future needs and returns they expect, robo-advisors are incapable of making educated guesses about what investments their clients should make to achieve their financial goals.

This limited service could be a reason why several firms still struggle to break-even with their investment in robo-advisors. Though there are new, more sophisticated and tech-heavy robo-advisors entering the market, the path to change is never linear but chaotic and messy. However, there is a segment of experts who believe that the robo-advisor industry is changing at lightning speed and will redefine the space.

Artificial intelligence is making its way into the robo-advisory industry, which will empower it to offer more diversified investment products, asset allocation or portfolio rebalancing. On the other hand, there is a rise of hybrid robo-advisors, which includes digital investing with human advisors. COVID-19 has indeed brought in a lucrative opportunity for this segment to grow as social distancing and less human interaction is here to stay for a while. Till situation normalizes and as digitization progresses, the demand for robo-advisors will be on the rise as people will become more comfortable exploring and using the advanced robo-advisors.

What do you think? Will you give a try to robo-advisors to test your money?