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Fintech 101: Robo-advisors

Dec 10, 2019 | Cognition, Fintech

Numerous aspects of traditional finance can be improved upon. The efforts by the entire Fintech sector will play a crucial role in unlocking new potential. One of the fastest-growing subsectors of this industry comes in the form of robo-advisors.

Modernizing Financial Advisors

For most consumers and even businesses, financial advice is often provided by banking experts. Every financial institution has a team of experts who will help anyone seeking financial or investment advice. 

Although this method has worked well for several decades, consumers and businesses have shown a demand for modernized versions of this business model. Face-to-face meetings will always be crucial, for a lot of the legwork can be done through automation and artificial intelligence. 

Queue the Robo-advisors

Various fintech startups and companies have begun looking into modernizing financial and investment advice. Rather than solely relying on human agents, they decided to let technology take care of the ‘grunt work” associated with this process. As a result of these efforts, the term robo-advisors was coined in the process.

Unlike what the name suggests, clients will not interface with a physical robot. Instead, these products provide a personal virtual assistant for consumers and businesses to engage in an open dialog. As this technology continues to be fine tuned, robo-advisors will slowly become the new normal in the finance sector.  

To this date, over 100 different robo-advisory services exist in the financial world. They can range from large-scale investment advice to regular consumers looking to optimize their savings. It also appears this business model keeps gaining popularity, primarily due to the lower cost associated with robo-advisory services. 

Key Areas of Success

Robo-advisory services have made their mark on various aspects of traditional finance. Popular areas include regular finances, investments, and portfolio management regarding stocks and bonds.

The automated investment advice provided by these wealth management services has yielded significant success for a lot of people. Due to its low cost, it is also more appealing to consumers with less of a budget to explore these markets. 

To date, the vast majority of these robo-advisors can be found in the US, Asia, and Europe. Australia and New Zealand have shown little interest in this modern form of online wealth management.

In Canada, some of the country’s biggest banks are experimenting with this new technology. It is currently employed by the Bank of Montreal and Wealthsimple, with more players expected to enter this market in the next three to five years. 

Early Start in 2008

Albeit robo-advisors have only been making headlines for a handful of years, this concept has been around since 2008. It was first introduced following that year’s financial crisis. That catastrophic event showed the banking sector a degree of innovation was needed, rather than it being an unnecessary luxury. 

The first “commercial” implementation of robo-advisory services came around in 2010. Entrepreneur Jon Stein launched the Betterment service at that time. At first, they were considered to be a virtual aide to manage regular bank information on behalf of clients. As time progressed, their functionality and viability was expanded upon, primarily due to client request. 

Future Growth Seems Inevitable

According to official statistics, robo-advisory services managed $60bn in assets globally. That figure has continued to grow ever since, and is expected to hit at least $2tn in assets by 2020.  Before this goal can be reached, robo-advisory firms will need to raise plenty of capital. That has not been much of a problem for fintech startups exploring this particular business model. 

Financial authorities also appear to be warming up to this new business model. This was highlighted in 2017, when the Monetary Authority of Singapore provided StashAway with a capital markets services license. As if often the case with new technology, the products are well ahead of any regulatory measures that might apply. Robo-advisors are no different, as the business model is still subject to regulatory scrutiny in some regions. 

Images courtesy of their respective sources.

Fintoism is not providing financial or investment advice. All content published on this platform is for entertainment and educational purposes only.

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<a href="https://fintoism.com/author/oglock/" target="_self">JP Buntinx</a>

JP Buntinx

JP Buntinx is passionate about cryptocurrencies, fintech, blockchain, and finance. He currently resides in Belgium.

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