A recent forecast by the European Banking Authority states that financial assets under the management of Robo advisors is expected to touch USD 450 billion by 2020. Robo advisors are essentially algorithms that implement decisions based on key parameters in an effort to maximize profit and limit risk.
Financial advisory services are in decline across the globe as increased regulations and liabilities have ensured advisors can no longer operate as they once did. The average retail investor lacks the acumen and expertise needed to understand financial markets. This has deterred retail participation in recent stock market rallies.
How do Robo Advisors work?
Robo advisors work by eliminating human decision making and intervention in the financial planning and investment cycle. Everything from collecting information, risk profiling of the client, recommending suitable financial instruments and executing trades is done electronically.
Complex machine learning algorithms are used to analyze enormous amounts of data to guide investors on current market trends and emerging scenarios. Robo Advisors ultimately reduce the cost of servicing clients because a single program is now able to perform the job previously done by thousands of humans.
Bots, Algorithms and Artificial Intelligence
The trading volume of stock markets in developed countries is dominated by artificial intelligence. Almost 80% of the daily stock trading volume is accounted for by algorithms. It has become extremely difficult for humans to compete against these bots because they cannot match them in micro-analysis, pattern recognition and speed of execution. Robo-advisors could thus evolve as countermeasures to rogue algo-traders.
The purpose of all Robo-advisors is to make money for humans and safeguard their investments. If you do not understand how financial markets work, you should opt for a Robo advisor rather than waste time trying to connect all the financial jargon thrown at you.
UK’s Largest Robo Advisor is www.nutmeg.com
Nutmeg manages close to £ 500 million (Rs 4150 Crore) invested in diverse portfolios. A person seeking to avail of their services only needs to set goals using an online questionnaire. Their algorithm will then try to determine how much risk you are willing to take and what rate of returns you expect. Once submitted the Robo-advisor will build a portfolio of financial assets that include stocks, bonds and other instruments.
Studies show that investing for the long term with a ten-year horizon greatly increases the chances of getting positive returns. The power of compounding is also harnessed by reinvesting your gains in the same scheme.
Is it Free?
No, Nutmeg will charge you 0.75% on your investments up to £ 100,000 and 0.35% on investments beyond it.
Is it Worth It?
Definitely, because humans can no longer compete with algorithms that already dominate trading. Take it for a spin and let us know what you feel about their offerings?
Other Notable Robo Advisors are:
Betterment which manages close to US$ 7 billion – www.betterment.com
Personal Capital which has about 1.5 million users – www.personalcapital.com
Wealthfront has assets under management(AUM) of USD 4.65 billion. – https://www.wealthfront.com
Money Farm (AUM – 2 billion) – www.moneyfarm.com/uk
Binck Forward (Dutch FinTech startup Pritle acquired by BinckBank for € 12.5 million.) – https://forward.binck.nl
The Scenario In India is well placed with more than a dozen Robo-advisory firms functioning. ArthaYantra is the oldest among them and has close to 130,000 users. The AUM of Robo-advisors is quite low in India compared to what the mutual fund industry manages but this will only grow in the coming years.