Who can robo-advisors target?
Traditional advisor services involve close face-to-face interaction between the advisor and the investor. In contrast to traditional services, with the rise of the online era the new millennial generation prefers to stay online, interact online and get advice online.
This new way of interaction poses requirements for the traditional Investment and Wealth management platforms. They are now required to provide both advisors and investors with access to real-time analytics and robo-advisor data from multiple providers, as well as new social-oriented features. Instead of a traditional talk at the golf course, the new generation requires the options to be available online, and within easy reach of their iPhone.
Robo-advisory is exactly this, a handy service complying with the new generation requirements. Combined with the move towards commoditizing the traditional brokerage services, robo-advisory enables the end-investors to step into this industry on their own, consuming the automatic services. For advisory platforms offering advanced features, such as the ability to fine-tune the preferred strategies of investment by an investor, the potential user audience is becoming comparable to the size of old-style investors.
Why are they becoming so popular?
Robo-advisors have grown in popularity because of the way more options they bring on board.
AI can calculate the prospective returns of a complicated Equity Option strategy in the blink of an eye, and give advice that will outweigh the traditional "buy these ETFs for better returns" approach. In addition, AI can also easily find the best combination of a conservative portfolio and a "best return" on that, in the words of Nassim Taleb, gives the best Return x Probability combination. Robo-Advisory may even catch the Black Swan for you!
With the increased automation level, the human advisor's role shifts to control and select the options he will make available for the investor. This is where the expert knowledge of traditional advisors is mostly needed, changing the way they serve clients.
How to develop the best-of-breed robo-advisory platform that fits everyone’s needs?
Developing a robo-advisory platform requires a vast amount of experience in building component-based and nowadays microservice-based systems.
At the technology level, Wealth Management platforms tend to offer not only Business Intelligence on the performance and risk of the portfolios and investment strategies, but also Big Data Expert Advice on the preferred strategies to follow, knowing client’s goals, risk tolerance and other customer personal data.
Robo-advisory as a service itself is now a combination of Deep Learning, Big Data and Quantitative Finance, so to build one, development firms have to be knowledgeable in all those areas. Development of such systems is no longer a craft, it's a science.
Writing the technical specification the future owner of the platform should keep in mind the end-user’s criteria. When customers look for the best platform, they usually consider the price vs functionality, which is rational in choosing any IT solution. With regard to a robo-advisory platform these criteria are commissions and features. The features are minimum deposit amount, supported account types and available markets for investments (stocks, bonds, futures, options).
Also, such features as automatic portfolio rebalancing to minimize risks, accurate P&L reporting, and tax lot harvesting to reduce the amount of tax, are a must that the platform should support for the robo-advisory to be effective.
What is the strategic IT direction in this field ?
To address new kinds of investors, the industry trend we see among software vendors is to provide open-architecture solutions, enabling new demands to be fulfilled by 3rd-party tools, such as robo-advisory, this allows more options for the both the advisor and the investor. This is where massive investment in research and development is being anticipated.
Article by Alexander Volkov, Solution Architect at Devexperts.