In the investment management world, the invasion of robots (don’t get scared) is already halfway there. Today, we’re seeing an uptick in interest in robo-advisors worldwide, with the projected annual growth rate of 14.19%.
The growth of the global robo-advisors market
Yet, human financial advisors shouldn’t feel threatened anyhow. In fact, they can now concentrate more on complex and relationship-driven tasks – a huge sigh of relief.
Investment advisors aren’t actually the only ones who benefit from technology. Armed with cutting-edge robo-advisors, investors can create financial plans in minutes, receive unbiased recommendations at little cost, and start to save for their dreams.
It’s worth admitting that the JatApp team is no stranger to robo-advisor development. In this blog post, we would like to answer the most common questions that may rise when building your own solution. But before we move on to the discussion, let’s take a moment to define a robo-advisor.
What is a robo-advisor?
A robo-advisor, or an investment advice tool, refers to a financial advising solution that relies on algorithms to align investment portfolios with investors’ needs. The technology determines the investor’s goals and risk appetite to help them build a diversified investment portfolio. Robo-advisors track users’ investments to keep them in line with their objectives as they change over time.
What makes robo-advisors so popular is their ease of use. All users need to do is to sign up and take a brief survey on their objectives and personal preferences. Thanks to its algorithms, the platform processes all the answers to generate the most promising opportunities. Once a user makes an investment, the technology will start to make contributions on their behalf.
Robo-advisor app functionality
How does digital investment advice differ from traditional?
Tech startups that build robo-advisor software are popping up like mushrooms in the rainy season. No wonder. Digital investment advice tools have a number of benefits compared to human financial advisors.
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Lower fees
Digital investment solutions cost much less than services of human advisors. Lower entry cost allows tech startups to attract investors of all financial backgrounds, making it possible to engage with them even before they have built their fortune. Meanwhile, traditional investment advisors charge a fee that many people, especially those new to investing, cannot afford, as efforts would not overweight the revenue in this case.
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No limitation to the number of clients
There’s always a limit to how many hats a financial advisor can wear. By contrast, a digital investment advice platform can handle as many clients simultaneously as needed.
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Transparent service
The investment algorithm is explained in detail, which makes the service transparent to the client. Moreover, digital solutions have less complex commission structure compared to traditional investment advisors.
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Instant answers
One of the most useful things is the ability to make quick investment decisions. No more waiting for days for financial advice and then watching opportunities swept away by other investor fellows. Investors can have instant answers to their questions 24/7. If there are any changes to the market, don’t expect a human advisor to call each client at the same time. A digital solution will rebalance a large number of clients in the matter of minutes.
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Unbiased approach
Digital advisors analyze data in an unbiased manner, while human advisors may receive payments for what they sell. All customers, regardless of their socio-economic status, receive the same level of financial services.
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Documented communication
With robo-advisors, all suggested investments are documented, which makes it easier to comply with numerous regulations. However, the same procedure can be quite challenging for a traditional investment advisor, who needs to audit and document everything during phone calls or face-to-face meetings.
Having read all these pros, you may start wondering who would ever want to get assistance from mere humans. In reality, though, robots will never fully replace financial advisors. Digital platforms can’t offer investment advice, if some unique circumstances of the client should be taken into account. If this unique factor is not included in the algorithm, the client won’t receive proper advice. That’s why more complex services, such as real estate management, usually require human involvement.
Unlike robots, human advisors can offer emotional support to a client, especially during the market corrections. They can help investors calm down, close their eyes, and imagine themselves by the waterfall, so that the latter would not make any rash decisions, such as selling during the market decline.
What are the types of digital investment advice tools and their service models?
Digital investment advice solutions fall into two major categories: client-facing and professional-facing tools.
Client-facing tools
Client-facing solutions can be roughly divided into two sub-categories:
Fully-automated investment advisors
These are technologies which presuppose that an investor has no contact with a financial advisor. Human involvement is required only when it comes to technical support. Certainly, such platforms have the lowest investment commissions.
An example of fully-automated tool
The hybrid robo-advisor tools
Hybrid solutions are when a customer interacts with a platform and a human advisor. In such a way, an investor can have the best of both worlds – they can enjoy lower fees and instant replies to their answers, while also being able to communicate with a real human to better understand investment nuances and context.
Professional-facing tools
Professional-facing solutions refer to the traditional model, where the client interacts with a human advisor only. Still, the advisor is equipped with a digital investment advice tool to increase their efficiency. More often than not, such tools have advanced features, as the end-user is more competent and experienced.
A professional-facing robo-advisor
What are the main challenges of developing robo-advisers?
FinTech companies and banks face a range of challenges when building their financial advice solutions. They need to come up with the right robo-advisor algorithm that will help to deliver the investment portfolio based on the answers given in the “Customer Profiling” section. Moreover, the timing of rebalancing has to be aligned with the investor’s unique needs.
Whether an investor opts for a robo-advisor from SigFig or from Betterment, they will end up with approximately the same financial returns. So how can FinTech startups or banks differentiate their solution on the market? To become more appealing in the investors’ eyes, companies need to focus more on improving user experience (UX) and delivering the most innovative features.
What is the functionality of digital investment advice tools?
A well-built digital investment advice solution should have both standard and “killer” features (not in the literal sense) to outcompete other players in this niche. Let’s talk about some of them for you to better grasp what’s trending right now.
Core features
The basic functionality of an investment advice solution includes customer profiling, investment selection, rebalancing, and trade execution.
Customer profiling
Robo-advisors invite investors to complete a questionnaire to identify their financial goals, risk tolerance, personal preferences, investment scope, and similar. What is most challenging here is to address users’ inconsistent or contradictory answers. The investment advice tool may send an error message encouraging them to revise their answers. A well-performing robo-advisor should also conduct regular reviews of the customer profile.
Customer profiling
Investment selection
The investment selection feature enables users to build the portfolio based on their needs. More importantly, the tool should give a clear explanation why a certain investment is best suited for a client.
Besides, cutting-edge algorithms should present the As-Is situation of the client’s investment portfolio by determining the portfolio’s diversification and whether it’s in line with the profile module. The To-Be situation is another important consideration. The solution should be able to recommend which investments to remove and which to add in the portfolio.
Investment selection
Rebalancing
This functionality should make a comparison between the As-Is and To-Be investment portfolios and suggest buy and sell orders, which are perfectly aligned with the investors’ preferences. The rebalancing feature should help to find the compromise between maintaining the portfolio in accordance with the customer profile answers and avoiding numerous rebalancing operations, which lead to additional commissions.
Rebalancing
Trade execution
When the rebalancing algorithm provides the client with orders, it’s time to execute the trades. Before taking this important step, it’s essential to conduct a suitability check to ensure that the resulting portfolio is aligned with the customer profile. Afterwards, the proposed trades are converted into the orders and sent to the market.
Trade execution
“Killer” features
Social trading, risk management, and big data collection are those functionalities that would allow you to differentiate yourself from the masses.
Social trading
Give your clients the ability to join investment communities and you’ll get them addicted to your robo-advisor platform. Similar to the effect of social media, such solutions make users come back for more data and insights from other fellows. With this feature, investors are able to compare their investment decisions and therefore learn to build a diversified portfolio way faster. It’s especially useful for those who are new to the investment world.
Social trading
Risk management
The risk management functionality offers users different what-if scenarios, so that they can sleep well, without worrying about the impact of possible global recession or oil price fall. This enables them to imagine the effects of market fluctuations on their investment goals and portfolio. Investors can also visualize the impact of pursuing a different investment strategy, making specific investments, or having withdrawals.
Risk management feature
Big data collection
Big data is everything, when it comes to making an investment decision. An innovative robo-advisor app should have the big data collection functionality to ensure proper investment selection. For example, the tool may collect data to assist users in finding investors with similar objectives and preferences. This helps to provide a user with an investment, which is already viewed as successful by people with similar goals.
Projections based on data from user’s linked accounts
Let human advisors deal with more creative tasks
While startups focus on professional-facing and automated client-facing solutions, banks mostly tap into the hybrid model. Whether you’re a young FinTech company or a well-established large bank, you may need a vetted software development company to build your own robo-advisor. JatApp has been delivering FinTech apps for seven years now. Over that time we’ve managed to become one of the top 1,000 B2B outsourcing companies in the whole world. But more importantly, we have won the hearts of our clients, and a five-star rating on Clutch proves that.
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