From cash to code: the rise of robo-advisors

Dhristi Agarwal, SciTech Editor

SciTech explores the growth of robo-advisors in the investment industry and how they're changing the way people invest and save for the future.

Not long ago, the financial world was characterised by tailored suits, well-worn ledgers, and seasoned experts who exclusively deciphered market complexities. However, the emergence of robo-advisors is restructuring finance and the fintech job landscape. 

Robo-advisors are online investment management services that employ mathematical algorithms to manage and allocate client assets in the most efficient way possible, making them particularly attractive to novice investors, altering the traditional investment advisory model.

Robo-advisors collect financial situation information from clients to determine risk tolerance and allocate assets based on risk preferences and desired target returns. While robo-advisors have the capability to allocate client assets across various investment products, their advice often leans toward exchange-traded funds (ETFs). Clients can choose between offerings with passive asset allocation techniques or active asset management styles. Notably, the first robo-advisor, Betterment, was launched in 2010 by Jon Stein which marked the beginning of their increasing popularity. By 2025, robo-advisory services are predicted to manage over $16 trillion, according to a report by Deloitte.

By harnessing technology, robo-advisors automate investment processes, reducing complexity and costs often associated with wealth management. They construct portfolios based on the Modern Portfolio Theory, focusing on minimising risk for a given return. They allocate assets based on investors' goals and risk profiles, adjusting portfolios as economic conditions change. For example, Wealthfront, a prominent robo-advisory firm, employs advanced algorithms to optimise asset allocation, tax efficiency, and risk management, thereby providing a comprehensive investment solution.

The growth of robo-advisors has impacted the FinTech job market, leading to increased demand for professionals with expertise in technology, data analysis, and algorithm development. Firms such as Vanguard are expanding their workforce to include data scientists, software engineers, and financial analysts focused on improving their robo-advisory platforms. This shift reflects the broader integration of technology within the financial industry. 

Nevertheless, challenges and concerns accompany the rise of robo-advisors. The potential for job displacement due to automation is a critical issue. Additionally, regulatory and security issues remain a concern, as ensuring the safe and ethical deployment of these technologies is paramount.

Human financial advisors usually possess the expertise required to execute trades and construct portfolios for their clients, catering to individual attitudes toward risk. They are responsible for re-evaluating investment goals based on changes in the market. For their expertise, management, and ability to execute, financial advisors charge client fees and/or commission and require clients to have anywhere between $25,000 and $200,000 or more to open an account. In contrast, robo-advisors charge relatively lower fees of around 1% of your invested amount and no minimum value, but this trade-off involves a decreased level of personalization when compared to human advisors. 

Choosing between a robo-advisor and a human financial advisor hinges on several critical factors. Human advisors offer a nuanced advantage during market downturns, steering clients away from impulsive decisions. Assessing your financial goals is essential—robo-advisors may suffice for streamlined decisions, while human advisors excel in complex matters like student loan plans or job compensation evaluations. Cost-wise, robo-advisors are typically more affordable, yet it's crucial to weigh the value against any minimum requirements. Your investment style matters: a robo-advisor suits a hands-off approach, but if you seek more control or specific investment options, a human advisor may be preferable. Additionally, consider specialisation—unique financial circumstances, like business ownership, may necessitate the tailored expertise of a human advisor. Weighing these factors ensures the investors choice aligns seamlessly with their financial aspirations.

However, the future of robo-advisors is promising as technology advances, they are likely to incorporate artificial intelligence, machine learning, and other sophisticated tools to provide even more personalised and effective investment strategies. While challenges and concerns persist, it will continue to shape and reduce job opportunities within the fintech sector, requiring professionals to adapt and acquire the skills necessary to navigate this evolving profession.

Note: This article is for informational purposes only and does not constitute an endorsement or promotion of any specific services. Please conduct your own research and exercise caution when considering financial services or investment options.

Featured image: Unsplash+/https://unsplash.com/photos/a-robot-holding-a-dollar-sign-in-its-hand-1gf8BVYmy90

As a student seeking financial independence, would you prefer using a robo-advisory service for investing or a traditional human account manager?