Artificial intelligence (AI) is the ability of machines or software to perform tasks that usually require human intelligence, such as learning, reasoning, and decision-making. AI has transformed various industries and sectors, including financial technology (FinTech).
One of the applications of AI in FinTech is robotic advisors, or robo-advisors, virtual financial advisors that provide customers with automated and personalized investment advice.
What Are Robo-Advisors?
Robo-advisors are online platforms that use algorithms and AI to deliver financial advisory services, such as portfolio management, asset allocation, risk assessment, and tax optimization. Robo-advisors typically require customers to complete a questionnaire about their financial goals, risk tolerance, time horizon, and personal preferences.
Based on the answers, robo-advisors generate a customized investment plan and portfolio for each customer. Robo-advisors then execute the project and manage the portfolio on behalf of the customer, using automated trading and rebalancing strategies.
Robo-advisors can offer various investment products like stocks, bonds, exchange-traded funds (ETFs), mutual funds, or cryptocurrencies. Some robo-advisors also provide access to human advisors or financial planners for additional guidance or support. Robo-advisors usually charge a low annual fee based on a percentage of the assets under management (AUM), ranging from 0% to 1%, depending on the level of service and features offered.
How Do Robo-Advisors Work?
Robo-advisors combine AI techniques, such as machine learning, natural language processing, and data analytics, to provide optimal investment solutions for customers. Machine learning enables robo-advisors to learn from data and improve their performance over time.
Natural language processing allows robo-advisors to understand and communicate with customers in natural language. Data analytics helps robo-advisors to analyze large amounts of data and generate insights and recommendations.
Robo-advisors use different algorithms and models to perform various tasks, such as:
- Asset allocation: Robo-advisors use optimization algorithms to determine the optimal mix of assets that matches the customer’s profile and objectives. Asset allocation maximizes returns while minimizing risk by diversifying the portfolio across different asset classes.
- Portfolio management: Robo-advisors use trading algorithms to execute orders and transactions in the market. Portfolio management involves buying and selling assets according to customer plans and preferences. Portfolio management also involves periodically rebalancing the portfolio to maintain the desired asset allocation and risk level.
- Risk assessment: Robo-advisors use risk models to measure and monitor the portfolio’s risk exposure. Risk assessment involves evaluating the potential losses or volatility of the portfolio under different scenarios or market conditions. Risk assessment also includes adjusting the portfolio to reduce or hedge the risk.
- Tax optimization: Robo-advisors use tax models to minimize the portfolio’s tax liability. Tax optimization involves applying various tax strategies, such as tax-loss harvesting, tax-efficient asset location, or tax-deferred accounts. Tax optimization also consists in reporting and filing taxes for the customer.
What Are the Benefits of Investing with Robo-Advisors?
Investing with robo-advisors can offer several benefits for investors looking for a convenient, low-cost, and personalized way of managing their finances. Some of these benefits are:
- Convenience: Robo-advisors are accessible online 24/7 from any device. Customers can easily open accounts, set goals, monitor progress, and make changes anytime and anywhere. Robo-advisors also save customers time and hassle by handling all the administrative tasks.
- Low cost: Robo-advisors charge lower fees than traditional financial advisors or brokers. Customers can benefit from lower commissions, transaction costs, account fees, or minimum balances. Customers can also benefit from lower taxes by using robo-advisors’ tax optimization features.
- Personalization: Robo-advisors tailor their services to each customer’s needs and preferences. Customers can choose from various investment options, risk levels, time horizons, and themes. Customers can adjust their plans and portfolios as their goals or circumstances change.
- Performance: Robo-advisors use advanced AI techniques and data-driven methods to provide optimal investment solutions for customers. Robo-advisors can generate higher returns using efficient asset allocation and portfolio management strategies. Robo-advisors can also reduce risk by using diversification and risk assessment techniques.
With this in mind, robo-advisors are virtual financial advisors that use AI and algorithms to provide customers with automated and personalized investment advice. Robo-advisors can offer convenience, low cost, personalization, and performance benefits for investors looking for a brilliant and simple way of investing their money. Robo-advisors are expected to grow in popularity and sophistication as AI and FinTech evolve and innovate.