What is a robo-advisor?
In recent years, Fintechs have emerged to bring technology and the financial sector closer together. As happened with RegTech
RegTech within the regulation field, in the wealth management sphere this technological revolution has given rise to the so-called WealthTechs companies and, specifically, to robo-advisors, covering the gap existing between the big financial institutions and the retail investor.
Robo-advisors are online financial advisors that provide automated online investment services, asset management services etc. They are based on algorithms structured like decision trees with a high degree of self-learning. They can execute the complete search, selection, allocation, monitoring and rebalancing process required to structure a retail investor’s portfolio, avoiding the human factor.
The reality is that, today, the majority of investment funds are surpassed by their benchmark, i.e. they are unable to beat their reference index. In this context, robo-advisors are born to provide a solution to said market need, with no intervention by a fund manager and at a lower cost, the latter of which is the main lure of the WealthTech companies that have come to light, according to the Deutsche Bank Research report.
Robo-advisors mainly focus on enabling investment in financial products which they replicate to the market at lower costs, to some extent thanks to the non-intervention of a manager. They seek to provide passive management tools like ETFs (index funds), adjusting client exposure to their risk profile and at lower costs. They also have the ability to rebalance the portfolio and reinvest dividends without the client needing to worry about it.
The advantages of robo-advisors
One obvious advantage which places robo-advisors a step ahead is the removal of intermediaries. The intervention of banks, managers, financial advisors and the bias produced by their emotions when choosing products means that the client is not always offered the best option. Charges for withdrawals, strategic agreements between banks and agents or the promotion of own products in many cases takes the upper hand over the search for the ideal product to suit every investor.
Cost saving, as already mentioned, is one of the keys to their success. Being a highly digitized system from which advisor intervention is removed makes the service less costly and means that the marginal cost of each transaction is greatly reduced. The commissions charged are far lower and attract young investors more accustomed to online services.
Lastly, access is another of the strong points of automated agents, since it increases the range of potential investors due to the fact that no minimum capital is required in many cases.