$2.5 trillion in assets managed in 2023! This is the figure forecasted to be reached by robo-advisors tools in 2023. In comparison, this is similar to India, UK, or France 2022 GDP.

If you’re here looking to discover more about the fast-growing concept of robo-advisors and automated investment platforms, I want to congratulate you for making the right choice. In this article, I’d like to guide you in the fascinating world of fintech tools and show you how you can leverage the perks of this modern technology.

In simple terms, robo-advisors are automated platforms used in multiple industries: Healthcare, Legal Services, Insurance, Human Resources, Retail or Energy, and Utilities. Nevertheless, probably some of the most high-profile and consistent use cases are mainly in the Financial industry where they provide algorithm-driven investment and wealth management services to clients. These platforms, which have gained popularity in recent years due to their accessibility, low fees, and convenience, use algorithms and machine learning to provide investment advice and manage client portfolios.

Some history

• The first robo-advisor was launched by Betterment in 2010 aiming to simplify and automate the investment process for individual investors. By the end of 2015, robo-advisers from almost 100 companies around the globe were managing $60 billion in assets of clients.
• The United States has the most assets under robo-advisor management of any country in the world ($1,164 billion in 2022)
• The number of end users is expected to amount to 234.30m by 2027.

Major FS players in offering services based on Robo-advisor tools:

• Vanguard Robo-Advisors – one of the most respected financial institutions in the world with $8.1 trillion in assets under management as of 2023. It offers two robo-advisors, a pure robo platform called Vanguard Digital Advisor, and the hybrid Personal Advisor Services that offers automated portfolios and access to human advisors. 
• Schwab Intelligent Portfolios – one of the largest brokerage firms in the world. Its automated portfolio offering has no management fee, making it one of the few that offer its services for free.
• Betterment – was one of the first robo-advisors companies, and it remains one of the largest measured by assets under management ($26.8 billion). This investing platform is incredibly intuitive and designed to make investing simple and fluid.
• Wealthfront – launched in 2008, it was a forerunner of the robo-advisor revolution. Wealthfront is best for someone who’s looking to make as few financial decisions as possible—as well as users who enjoy lots of features and messing around with graphs and charts.
• Questwealth Portfolios – an online investment management service offered by Questrade, a Canadian online brokerage. The solution stands out due to its low-cost investing, diversified portfolios, automated management, goal-based approach, access to human advisors, and user-friendly platform.

Services Offered by Robo Advisors

Automated investment platforms offer a wide range of services designed to assist investors in managing their portfolios and achieving their financial goals:

• Automated Portfolio Construction: Robo advisors use algorithms to construct portfolios based on clients’ investment objectives, risk tolerance, and time horizon. They consider factors such as asset allocation, diversification, and investment preferences to create a customized investment plan.
• Goal-Based Investing: Most of these tools allow investors to set specific financial goals, such as retirement planning, saving for a down payment on a home, or funding education. The platform then designs an investment strategy tailored to the specified goal, considering factors such as the desired timeline and target amount.
• Risk Assessment and Profiling: Robo advisors typically assess a client’s risk tolerance through a questionnaire or survey. Based on the responses, they assign an appropriate risk profile to the investor, which helps determine the optimal asset allocation and investment strategy.
• Automated Rebalancing: This modern technology can also be used to monitor portfolios and automatically rebalance them when necessary continuously. This process involves adjusting the portfolio’s asset allocation to maintain the desired risk level and align with the client’s goals.
• Tax Optimization Strategies: Some robo advisors offer tax-efficient investment strategies to help investors minimize their tax liabilities.
• Automatic Dividend Reinvestment: Automated investment platforms often allow automatically reinvesting of dividends and other investment income back into the portfolio. This feature helps compound returns over time and ensures that cash flows are reinvested rather than remaining idle. 

It’s important to note that the specific services offered may vary among Robo advisor platforms. Investors should research and compare different providers to find the one that aligns with their investment needs and preferences.

Benefits of Robo Advisors

• Lower Fees: By leveraging technology and automation, robo-advisors eliminate the need for human intermediaries and associated costs. This cost efficiency allows investors to keep a larger portion of their investment returns.
• Accessibility and Inclusivity: Robo advisors have democratized investing by making it accessible to a broader range of individuals. They often have lower minimum investment requirements, allowing people with smaller amounts of capital to participate in the investment markets.  At the same time, they offer educational resources and financial planning tools to help investors make informed decisions. These resources can include articles, tutorials, retirement calculators, and goal-setting features.
• Enhanced Efficiency: Automated investment platforms streamline the investment process. They employ sophisticated algorithms that can swiftly analyze a client’s financial situation, risk tolerance, and investment goals to provide personalized investment recommendations. This efficiency saves time for both investors and advisors, eliminating the need for extensive manual paperwork and lengthy consultations.
• Data-Driven Insights: Another benefit of robo-advisors is that they can leverage advanced analytics and machine learning to process vast amounts of financial data. This data-driven approach helps identify investment trends, correlations, and patterns that human advisors may overlook. By continuously analyzing market data, robo-advisors can make informed investment decisions and adapt portfolios to changing market conditions.
• Diversification and Risk Management: Robo advisors often employ Modern Portfolio Theory (MPT) principles to construct portfolios that are diversified across different asset classes and industries. By spreading investments across a range of assets, they aim to reduce risk and maximize potential returns. Additionally, automated portfolio rebalancing ensures that the asset allocation remains aligned with the client’s risk profile, reducing the impact of market fluctuations.

Weaknesses of using Robo Advisors

• Limited Human Interaction: Financial Services business is built on trust therefore some customers would require face-to-face advice or the ability to discuss their financial goals and concerns with a dedicated advisor. Many robo-advisors are incorporating hybrid models, combining automated platforms with access to human financial advisors.
• Excessive standardization: Robo-advisors typically offer standardized investment strategies and recommendations based on algorithms. They may overlook or not take into consideration unique circumstances, preferences, or changes in personal situations.
• Risk of Algorithmic Errors or Bias: Robo advisors rely on algorithms and historical data to make investment decisions. However, algorithms are developed by humans and can still be subject to errors or biases.

How can you Easily Create a Robo Advisor or Automated Investment Platform?

Creating a robo advisor or automated investment platform requires a combination of technical expertise and financial knowledge. Here are the steps involved in creating such a platform:

1. Define the business requirements: The first step is to define the business requirements for the platform. This involves identifying the target market, the types of investments that will be offered, and the level of automation required. It is essential to have a clear understanding of the business requirements before proceeding to the next step.
2. Perform a gap analysis: The next step is to perform a gap analysis to identify any gaps between the business requirements and the existing IT landscape. This involves identifying any existing systems that can be leveraged and any new systems that need to be developed.
3. Map the functionality: Once the gap analysis is complete, the next step is to map the functionality of the new system to the existing IT landscape. This involves identifying the interfaces between the new system and the existing systems.
4. Create a solution design: The solution design is a high-level design of the new system. It should include the architecture, data model, and algorithms that will be used to provide investment advice and manage portfolios.
5. Create a physical network blueprint: The physical network blueprint is a detailed design of the hardware and software components that will be used to implement the new system. This includes servers, storage devices, and networking equipment.
6. Define interfaces for system integration: The next step is to define the interfaces for system integration. This involves identifying the protocols and data formats that will be used to exchange data between the new system and the existing systems.
7. Create a blueprint for the deployment environment: The final step is to create a blueprint for the deployment environment. This includes the hardware and software components that will be used to deploy the new system, as well as the procedures for deploying and maintaining the system.

Once the platform is developed, it is important to test it thoroughly before deploying it to production. This involves testing the functionality, performance, and security of the system.

Robo Advisors in 2023 – Finishing Touches 

In conclusion, creating a robo advisor or automated investment platform requires a combination of technical expertise and financial knowledge. It is important to have a clear understanding of the business requirements and to perform a gap analysis before proceeding with the development of the platform. Once the platform is developed, it is important to test it thoroughly before deploying it to production.