The document discusses investment robo-advisor systems. It begins with a brief history of robo-advisors, noting they were first founded in 2008 but became widespread about 10 years ago in response to the financial crisis. It then discusses how technology plays a key role in achieving the business goals of robo-advisors by allowing them to provide automated, low-cost financial advice through algorithms. The document provides an overview of how robo-advisors operate by taking clients through an online questionnaire to develop personalized portfolios using ETFs and index funds.

1. INVESTMENT ROBO-ADVISOR
SYSTEM
GET 302/602 Final Group Paper
Group Members: Chen Qianqian; Cockrell Thaney Elyse; Conway
Karim Gregory; Gupta Sanya Premkumar; Khan Nabil Asad;
Rand Tyler Philip; Sachdev Divya

2. 1
Table of Contents
Introduction..................................................................................................................................................2
History and Evolution...................................................................................................................................2
Technology and its role in achieving the business goals ............................................................................3
Financial advisors .....................................................................................................................................3
Robo Investment Advisors.......................................................................................................................4
Technology behind robo-investors..........................................................................................................4
Business goals...........................................................................................................................................6
Security of Robo-Advisors............................................................................................................................7
Current cybersecurity in Financial Service Industry................................................................................7
Cybersecurity for robo-advisors ..............................................................................................................8
Regulations of Robo Advisory Firms............................................................................................................9
Robo Advisors across the globe.................................................................................................................11
Trends in robo advisor industry.................................................................................................................12
Success Formula of Robo Advisors ........................................................................................................14
Critical Success Factors for Robo- Advisors...........................................................................................15
Future of Robo Advisors.........................................................................................................................16
Advantages of using Robo advisors...........................................................................................................16
Conclusion ..................................................................................................................................................17
References..................................................................................................................................................18

3. 2
Introduction
Financial advisors have always been considered as one of the prime assets for wealth
management firms as they possess the skills and knowledge to understand the financial
objectives of the clients. They have the ability to figure out the intricacies of the financial market
and make recommendations based on the client’s market value, financial position and their
ability to deal with risks. Recently, organizations have been making huge investments in an
attempt to automate the services delivered by financial advisors which has led to the rise of robo
advisor systems.
Robo-advisors are technology based financial advisors that use minimal or negligible human
interventions. These financial advisors are automated systems that use algorithms and
technology to give people advice. Typically, robo-advisors provide insights about portfolio
management and use the information provided by you to make decisions. When you join any
robo-advisor company you are asked a series of questions that will be used to determine anything
from portfolio rebalancing to tax loss harvesting to dividend reinvestment. The technology used
by robo-advisors mimics the software used by human advisors. The biggest difference between
Robo-Advisors and traditional advisors is the human touch. Technology based advisors clearly do
not know you personally and can’t take that into consideration when giving advice. Overall, a
robo-advisor is a form of online wealth management tool without human interaction.
Robo-Advisor’s main audience are the people with low account minimums and the technology
aspect attracts a younger crowd. Since younger people are typically more trusting and
comfortable with technology there is no fear in trusting a Robo-Advisor over a traditional human
advisor. The main benefit of Robo-Advisors is that people who need advice can now get it at a
reasonable price.
History and Evolution
Robo-advisors were first founded in 2008 but the use of automated advice became widespread
about 10 years ago. The advent of Robo-Advisors were attributed to the financial crisis. Initially
they were going to be used to “rebalance investor assets within target-date funds, and give
investors a modern, online interface.” (FutureAdvisor, 2008). This idea of eliminating the middle
man and direct access was also growing quickly. Online wealth management was prevalent since
1990’s and the use of software for giving advice was developing but they did not feel the need to
eliminate the middleman.

4. 3
In the 1990’s customers were often uncomfortable with technology and were not ready to share
their personal information online. During this time, wealth management software was only sold
to traditional advisors that were working and charging fees for their services. Over time there
was an increase in online wealth tools and services and the start of technology in the financial
industry skyrocketed. Places such as Silicon Valley gave the industry proof that technology was
making an impact and that customer habits had changed.
Robo-advisors are a new type of advisor that increase the automated services available to the
customers. The automation allows services and companies to become more accessible and
scalable. It will not be long until Robo-Advisors will have more services to offer such as cash-flow
management, tax planning or even college savings.
Technology and its role in achieving the business goals
Financial advisors
According to Stephen Horan, Head of private wealth at CFA Institute, Financial Advisors assess
an individual’s monetary holdings and assets and helps them achieve their financial goals. They
are usually employed by investment firms, banks or insurance companies. They would develop a
plan or schedule a meeting with their clients and help them achieve their financial goals by
selecting the best combination of insurance plans, stocks and mutual funds. Advisors with special
license could also sell their own financial products to their clients.
This process was generally hectic and time consuming. Moreover, the advisor essentially follows
his academic work with his understanding of the market trends to help his clients which is highly
unpredictable and may or may not work in clients’ favor. Often when any clients’ investment go
wrong, it would turn very sour between the advisor and clients and moreover there would be lot
of emotional baggage accompanied with the loss. Furthermore, there is always a chance of
employees who might try to manipulate clients for personal gains.
However, the traditional system had the benefit of having a personal contact with the advisor
where they can have a verbal and one-to-one communication with them which gave them an
assurance for their investment.

5. 4
Robo Investment Advisors
With advancements in information technology, there is a huge shift in the way people manage
their money (Stein, betterment.com). Better computing and information flows has led to
development of backbend brokerage products such as target-date funds and ETFs.
A robo-advisor is a result of this advancement. It is a technology assisted online wealth
management portal that provides financial advice to its clients. They basically work on the
sophisticated management and investment algorithms that are coded into the system that
delivers lower cost investing platforms to the public. There are approximately 25 robo-advisors
available in the market today such as Betterment.com, Wealthfront, FutureAdvisor, SigFig,
Personal Capital and many more. Some of them are completely automated and others have a
slight human intervention.
Robo-investment advisors is nothing but a website like any other which makes use of some highly
complex and sophisticated algorithms. When a potential client logs on this website, the robo-
advisors takes them through a series of questions to understand their goals and risk tolerance
capacity. The advisor takes in this information and runs a calculator through them and
accordingly, they build a diversified portfolio using passive investments like ETFs and index funds.
Technology behind robo-investors
Robo-Investors could attain such a huge popularity because of the creation of index-tracking ETFs
(exchange-traded funds) and cloud computing. ETFs allows an individual to own all the stocks
that forms a major index in their brokerage account. This is far more efficient than equivalent
index fund because it allows to put together low-cost, liquid portfolios and improve tax-
efficiency. It can generate an incremental after-tax return of 2.46% (blog.wealthfront.com). On
the other hand, cloud-computing allows the engineers to make and test products in cost and
time-efficient ways. The result is low-cost, optimized investment platform that gives user a
seamless user experience.

6. 5
Robo-Investment advisors are websites that requires a potential client to log in the website. The
website then links the clients’ account to their checking account in a few minutes. Then the client
is taken through a brief questionnaire to understand their risk tolerance level. This questionnaire
essentially consists of questions like client’s age, salary, liquid assets, and clients’ priorities. It also
has some analytical questions that aims to understand the clients’ reaction in critical situations.
For example, one of the question that is asked in wealthfront.com is, in this volatile global market,
what would be the clients’ reaction if he loses 10% of his entire investment portfolio
(wealthfront.com). And the options that are typically provided are:
1) sell all the investments
2) sell part of the investment
3) keep all the investments
4) buy more stocks.
Based on such questions, the clients are given risk tolerance points which can be adjusted by the
client. And then, the clients’ capital is divided between ETFs in stocks and Treasury Bonds. These

7. 6
ETFs are passively managed by the online advisors who track a variety of indexes based on a
coded intelligent algorithms (Furman, 2011).
Wealthfront.com
The above figure is an illustration of how the Wealthfront robo advisor distributes the investment
among different stocks and bonds. The risk tolerance of the client is calculated to be 8.0 and the
liquid assets were assumed to be $40,000. Based on these details and other answers, the client
should invest 35% in US Stocks, 22% in foreign stocks, so on and so forth.
Business goals
Robo-Investment Advisors are much more than just an online service that makes it convenient
for investors to manage their online investments. This new-age technology gives much more than
an online platform (betterment.com)
It automates the deposits, thus enabling the client to buy stocks and bonds on a regular
basis. This makes the investment steady and prevents the clients from making impulsive
decisions. Hence, better investment portfolios, better returns and better growth
It helps in managing the risk since the whole concept works on clients’ risk-tolerance level.
They also mitigate risk by diversifying the investments and maintaining an optimal asset.

8. 7
It uses graphs, pictures which helps them leverage better reporting solutions, thus giving
the clients a better explanation of the activity and the returns.
Also a potential client can visit the website as many number of times to make a final
decision of the choice of investment advisors. Sitting at one location, user gets a variety
of choices among investment advisors. This saves their time and adds to their
convenience.
Lastly, robo-advisors are a cost-effective investment advisors. They charge minimal
amount and general principle is more the investment, less is the percentage of the
investment that is charged. This is convenient to the client as he is getting cheaper
services and also for the advisors as they make great client foundation and earn good
commission.
Security of Robo-Advisors
Cybersecurity has been regarded as a hot topic when the Securities and Exchange Commission’s
(SEC) Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry
Regulatory Authority (FINRA) release their reports related on cybersecurity issues. The online
activities involved with financial investments are easily targeted by cyber criminals. How to
protect clients’ information from technology breaches is a key factor for attracting and retaining
customers.
Instead of collaborating with a real human advisor, robo-advisors offer investment advice based
on clients’ digital portfolios. It is a program that helps clients manage their assets based on
algorithms, personalized by clients’ recoded preference. No human interaction is involved during
the whole process from making investments to researching options, which makes robo-advisor a
relatively low-cost service. But at the same time, it is more exposed to online threats.
Current cybersecurity in Financial Service Industry
Despite that North American Securities Administrators Association stated that there were only
4% of small to mid-sized RIA firms have experienced a cybersecurity attack, (Leonhardt, 2014)
Neal O’Farrell pointed out that cybersecurity breaches are not rare, but just not detected.
According to his study, there are still 37% firms did not take risk assessments to identify
cybersecurity threats, vulnerabilities and potential consequences at all. (Leonhardt, 2014)
On February 3rd, both SEC and FINRA released their reports about cybersecurity in registered
broker-dealers and investment advisers. According to their study, there are two notable

9. 8
weaknesses in cybersecurity protection. Firstly, there are potential risks in terms of third party
management. A lot of broker-dealer and investment advisor firms engage, or collaborate with
third-party vendors, and allow these third-parties access to confidential information. What is
worse, there are 16% of investigated broker-dealer firms, and 68% of investigated investment
adviser firms, that did not require cybersecurity risk assessments of third-parties with access to
their networks. (Zeoli, 2015) In this case, hackers can easily attack broker-dealer firms, or
investment adviser firms through the weak third-parties.
Secondly, it depends on whether a firm maintains insurance for cybersecurity incidents.
According to the OCIE Report, there are 58% of broker-dealers, and only 21% of investment
advisors provide insurance for cybersecurity incidents. In fact, there are only a very small part of
the investigated broker-dealers and investment advisors having completed policies and
procedures about how to deal with the loss caused by cyber breaches.
Generally, the cybersecurity in financial institutions are not as strong as we thought. As financial
advisor services are becoming more and more digitalized and mobilized, cybersecurity would be
a far important issue to be considered since any benefits would mean nothing if the clients’
information are leaked.
Cybersecurity for robo-advisors
As a highly automated and digitalized investment program, robo-advisors can have a real
advantage only after it experienced a cyber-security audit. What is the cyber security of robo-
advisors? And how to evaluate whether the robo-advisors is safe?
Here are two famous robo-advisors in the market: Bettermenti and Wealthfrontii. We compare
the strength of cybersecurity from security and privacy, fraud detection, and account protection
perspectives:
Betterment Wealthfront
Security &
Privacy
• Use the strongest browser
encryption available, store the
entire information on servers in a
safe office, and implement orderly
methods and systems for securing
and putting away information
• Protect the protection of clients'
data and not to share the data with
Users assets are held in an account
at a third-party custodian named
Apex Clearing. Wealthfront only has
the right to issue trading
instructions against your account. It
cannot access users’ cash other
than to receive its monthly advisory
fee.

10. 9
any third party without users’
permission
Fraud
Protection
Being committed to protecting users’
account from unauthorized activity.
• Report the unauthorized activity
in users’ account immediately.
• Work to recover any loss that
results from unauthorized use of
Betterment account.
No specific fraud protection, but it
states that there is no Proprietary
Trading.
Account
Protection
Betterment is a member of SIPC, which
protects Betterment’s accounts up to
$500,000 (including $250,000 for claims
for cash). Even if something happens to
Betterment, you will still get your
securities back.
Because of the limits on SIPC, Apex
Clearing has secured excess SIPC
insurance that provides an
additional $150 million of coverage
across all its clients.
Combined with the potential risks proposed by OCIE and FINRA, Wealthfront may be dangerous:
it works with a third party – Apex Clearing. In the reasons why Wealthfront use Apex Clearing
Corporation to custody and clear client assets, it neither mentioned risk assessment about
identifying cybersecurity; Secondly, it only states that there is no proprietary trading. However,
it does not specifically figure out how to deal with the loss caused by unauthorized activities.
Despite that it does not necessarily mean that Betterment is better than Wealthfront, clients
should learn more about cybersecurity policies and practices when they decide to use a robo-
advisor.
Regulations of Robo Advisory Firms
The regulatory governing body of Robo-Advisors are the Stocks and Exchange Committee (SEC).
This means that Robo-Advisors are regulated by the guidelines and policies laid out by the federal
government. Robo-Advisors utilize algorithms and model portfolios to allocate investments for
their clients. (Stalter 2014) The software that is utilized is similar to that of a traditional human
advisor, but they only specify in portfolio management which creates less personal interaction as

11. 10
they are not dealing with more personal wealth management systems such as taxes or retirement
planning.
Robo-Advisors based their services off of the client’s objectives and what they want to achieve
out of their transactions. One of the services of the Robo-Advisors is to let their clients
understand the risk tolerance for investing with their services. There are certain restrictions and
limitations that the Robo-Advisors assert on their clients as restrictions are stated by the SEC
guidelines.
Even though the Robo-Advisor is a more user-friendly system to use, it may lose some of its
stability because it does not provide its clients with more detailed and equipped information
about transactions. This is more common with traditional advisory firms that are specialized in
giving detailed explanations for various transactions. Robo-Advisor loses the personal interaction
that a human advisor could provide and more a run-down explanation for its clients. Robo-
Advisor provides very clear cut responses to its clients so that may be favorable to some and not
to others.
Some of the services that Robo-Advisor provides are rebalancing accounts, dividend
reinvestments, and even tax-loss harvesting. As mentioned as before, even though Robo-
Advisors cannot give personal and more thorough details about transactions its user-friendliness
is highly rated.
If we look at the two leading major companies for Robo-Advisors, Betterment and Wealthfront,
there are some similarities and differences in how they offer their services to their clients. These
differences are based off of some critical criteria such as cost, custody, account types,
investments, taxes, and stocks. Different Robo-Advisor firms have different costs for their
services. For example, Betterment allows their clients to invest however much they want to
invest in stocks and bonds. There is also no charge with Betterment to create an account. The
fees that Betterment charges are for dependent on the account balance. (Berger 2015)
Wealthfront is very similar in the services they offer as Betterment but charge their clients $5000
to create an account. Also, the management fees that are associated with the account can also
be charged. Wealthfront also boosts itself in claiming their services are an “Automated
Investment Service for everyone.” (Stalter 2014)
In terms of custody, some services require that money transfers go through their own firm
whereas others go through other well-known brokerages. Also, account types may differ
depending on the firm that one chooses. Some firms offer taxable accounts and IRA retirement
accounts, but some do not account for those who may be self-employed. Investment options are
another difference that separate firms in terms of services. Certain firms limit their investors to
invest to the ETF’s but other firms are more flexible in terms of investing. Tax features are also
included in some firms such as tax loss harvesting but not all firms include the special feature.

12. 11
Lastly, some firms allow the investor to invest in individual stocks, but the majority of firms do
not allow a single-stock investment. (Berger 2015)
Robo Advisors across the globe
Robo-Advisors are a relatively new kind of company, and because of this, coupled with their need
for cutting-edge technology and upfront capital investment, they are found primarily in first
world countries, specifically the United States. There are under 50 total Robo-Advisors firms
worldwide but that number is increasing steadily as the technology matures and consumer
awareness grows, though they likely won’t be found in third world countries for some years.
The technology for using Robo-Advisor across national borders exists and is utilized in some
places, but tax regulations are keeping it from being fully adopted by Robo-Advisor firms. Because
of the United States's complex tax regulations, U.S. citizens are forced to invest with only
domestic Robo-Advisor firms. The largest two U.S. based Robo-Advisor companies, Wealthfront
and Betterment, say on their FAQ pages that they can only accept U.S. citizens with valid social
security numbers, U.S. bank accounts, and U.S. mailing addresses
(https://pages.wealthfront.com/faq/ and http://support.betterment.com/). Other countries
have slightly more relaxed regulations; they only require a bank account in the region and not
having any tax liabilities in the United States, and not being a United States citizen. An example
is Money on Toast, a UK based Robo-Advisor firm which can accept any customer with a UK bank
account and a residence in the UK, but not anyone from the U.S. due to tax regulations
(https://www.moneyontoast.com/faqs/). The difference is this allows a person from outside the
UK to use Money on Toast as long as they have a UK bank account and residence. For people with
dual citizenship, one being a United States citizenship and filing taxes in the U.S. is a deal breaker
for using a Robo-Advisor from another country.
Within a particular Robo-Advisor firm, portfolios' contents aren't limited by geographic
boundaries. Companies will buy stocks, bonds, and all other assets on various other countries'
markets to create the ideal portfolios for their clients, based on what the clients have selected.
This is all made easily possible with the various exchanges being connected over the internet,
allowing investors to place orders with exchanges worldwide. While portfolios can be made up
of assets from all over the globe, they usually come from the local country or group of countries
to avoid currency exchange loss. Unless otherwise specified a portfolio can be assumed to include
international assets in some moderation.

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Trends in robo advisor industry
For any technology to establish itself in the market, they need to have hyper growth opportunity
backed up by big numbers and great margins. According to Michael Kitces, one of the famous
American financial planners, recently commented that “32 million mass affluent Americans have
assets in the range of $100,000 to $1 million, and of these only 20% have an advisor. Future
Advisor, another major robo advisor firm has 80% of clients who never had an advisor” (Kitces,
2015). As of December 2014, the total assets under management for the top three robo advisory
firms, Wealthfront, Betterment and FutureAdvisor combined was more than $14 billion (SEC ADV
filings, Crunchbase, 2014). In fact, Wealthfront alone is soon going to cross the $1.5 billion mark.
These numbers clearly depicts that the probability of robo advisors dominating the market is
quite high. Through robo-advisors, the investment management firms will be able to successfully
capture a new segment of the market industry, thus providing them new avenues for generating
profits.
In the business world which is highly competitive, with onset of any new technology, there are
competitors ready to offer similar services at a relatively lower rate or with better quality. This
aspect of the business sector is beneficial for customers as they get the opportunity to choose
from multitude of options. Currently, there are many financial advisory firms proposing similar
services for the same set of audience; namely Wealthfront, Betterment, Learnvest, Personal
Capital, Jemstep, SigFig, MarketRiders, Covestor etc.
There have been a number of reasons attributed to the significant increase in the revenues for
robo-advisory firms. Firstly, it has been observed that there is a strong correlation between digital
interactions and revenue. Forrester Research in 2012 found that revenues were largely driven
with frequent advisor interactions. Client believe that social network interaction are the most
powerful form of connections, trailed by online communication (text and chat), and then
followed by advisor company’s website. In the current era, US adults spend majority of their time
performing activities online. Moreover, a survey by North American Techno graphics determined
that in 2010, only 22% of the investors were in agreement with the statement “clients feel online
advice is just as good as what they can get from a traditional advisor” (Doyle, 2013). This
percentage increased to 44% when the same survey was conducted in 2014.
Secondly, robo advisors can operate more economically as they use cloud rather than mainframe.
For example, Wealthfront’s wealth manager receives the market data from Bloomberg, while
Apex is used for clearing and Vanguard is used for ETF’s. For the conventional financial advisors,
the annual fees for managing mutual funds is 1.5%, on the other hand robo-advisory firms like
Wealthfront only charge 0.25% (Doyle, 2013). And recently Charles Schwab has entered the robo

14. 13
advisory market and is ready to offer the service for free. Charles Schwab is attempting to expand
and differentiate returns through smart beta exchange traded funds.
Another significant trend that has been observed is the convergence of human and robo-
advisors. We can expect that robo-advisors would basically depict the prospects human advisors
managing customer’s portfolio. Besides, several human advisors are using technology to govern
their businesses like a "robo-advisors”. Fidelity Institutional Wealth Services has embraced the
robo advisor trend by partnering with Betterment. The move has been really bene ficial for both
as the registered investment advisors would be able to work on Betterment’s platform and
provide services to their existing clients as well as potentially attract new clients. Jon Stein, CEO
and cofounder of Betterment commented “Marrying technology with advisor helps to develop
client relationships, recommend solution for growing their business, and attract prospective
clients along with focusing on high profit sectors with highest margin activities”. (Kane, 2014).
These robo advisory firms are clearly demonstrating the fact that the whole process of creating
and formulating a strategic portfolio can be executed without a huge investment. 2009-2014 was
considered an era where technology-driven portfolios were transformed and index funds were
introduced in the market which affected the stock traders who had been trading in the market
for the last 40 years. Conspicuously, the advent of index funds did not replace the human
advisors, instead forced these advisors to revive and evolve their value propositions in order to
keep up with the global technological breakthroughs.
The robo advisor market also represents a new opportunity for specifically ETF providers such as
Vanguard, which is highly focused on dealing with low expense ratios (Ullal, First Bridge Data).
Vanguard, one of the largest mutual fund provider across the globe and the third largest ETF
provider in the US has presented plans of entering the robo advisory industry with the name
‘Personal Advisor Services’ Recently, a Vanguard representative commented that they intend to
use robo advisory services as means of evolving the planning and advice services based on what
they have learnt in the last three decades.
The financial experts in the industry believe that ETF providers would be gaining maximum
through strong bonding with robo advisors. Majority of the robo advisor systems works on the
concept of brokerage and their primary goal is to focus on low cost indices in order to have best
possible investment strategy model. The robo advisor segment has a lot to offer to the specialized
ETF providers as they typically belong to the low cost indexes advisor group.
Robo advisors are facilitating the adoption of latest technological trends. There is a high
possibility of robo advisors integrating technology at a rapid pace in areas such as
implementation of mobile applications and employing artificial intelligence to establish strong
client communication that would enable the wealth managers to respond fast. The robo advisory

15. 14
websites need to take utmost consideration of not over complicating their websites for the first
time visitors.
Success Formula of Robo Advisors
For venture capitalists, the success largely depends on the Return on Investments (ROI). There
has been an exponential growth in terms of revenue for robo advisory firms in the last 3 years
owing to the favorable market conditions (Bull market). The above table depicts that, within the
next decade, Betterment needs to generate $56.5 billion, Wealthfront $82.8 needs billion and
Personal Capital needs $18.9 billion (Personal Capital has a relatively higher fee structure).
Venture capitalists only have a limited ownership of these firms, and in order to get the returns
as expected, these numbers need to greater than projected. Considering the pace at which these
firms are generating revenue, these numbers are not impossible and if exponential growth
persists, these organizations would be able to reach their target values. Combined, the three
aforementioned robo-advisors would be tentatively 50% greater than whole PIMCO mutual fund
organization has gathered over its total existence.
Wealth management firms can leverage their services in the robo advisor market through
developing effective strategies. A number of factors should be kept in mind while developing
such a strategy:
1. Research: The organization needs to understand the philosophy behind the robo advisor
trend as well as the target audience. For example, Wealthfront focuses on low cost
investing in market cap weighted ETFs followed by tax loss harvesting.
2. Engage with the platform: The products should be created in such a manner that they
seamlessly fit in the way users want it. They should be a good fit for the portfolio
construction approach and workflow of the platform.

16. 15
3. Assess technology: The organizations need to be proficient in terms of resources and
expertise to build the required technology.
4. Discuss business terms: The products can be made more available to the users by
offering lucrative incentives. The organizations can collaborate with technical product
providers.
5. Integration: The users should have access to timely and accurate data which is feasible
by pursuing integration.
Critical Success Factors for Robo- Advisors
Traditionally clients meet up with financial advisors who consult them on their finances but now
individuals are starting to utilize robo advisors. Robo advisory will continue to grow in the near
future as long as they continue to hold on to the key factors that made them successful in the
financial market. Robo advisors came into the picture in 2008 after the financial market crashed.
They were installed to stabilize the market and help with economic recovery. During this time
many individuals who wanted to invest their money were skeptical to use such automated
services.
To combat this uncertainty Robo advising companies like Wealthfront and Betterment decided
to reach out to every mainstream investors irrespective of their age or status by giving them
access to a service that was once reserved for high-net-worth individuals. This strategy allows
them to appeal to a large group of individuals, as compared to traditional advisors who mainly
aim their products at a select group of people. “Typical wealth management services in major
financial institutions require minimum investable assets of a million dollars or more.”iii
Robo advisors contest tradition strategies by enticing the everyday person, the individuals who
does not have one million dollars lying around to invest. The median U.S. household income is
about $53,000.iv Making it difficult for individuals to meet this criteria. Robo advisor companies
have noticed this and have attract not only millennials but older generations like the baby
boomers too. Millennials like the fact that robo advisors eliminates face to face interactions with
human advisors. Millennials are accustom to using technology and more willing to try robo
advising platforms. Older generations also like that these companies use the same algorithms
that traditional financial advisors use. Being attractive to many generations is a major success of
robo advisors.

17. 16
Future of Robo Advisors
A huge amount of data is generated regularly which needs to be processed and analyzed. With
technological advancements resulting in cheaper, accurate and faster systems; there is an
increased dependency on smart machines to process all of this data.v Throughout the course of
history we have seen new technologies change our society. Mankind has always integrated new
machinery to solve problems faster and eliminate human error. Companies have noticed this and
have started to change their business strategies in order to accommodate for this ongoing trend.
Even in the times of the Industrial Revolution, companies used new technologies that eventually
displaced many manual jobs. However it also created a demand for people with new skills, people
that would be needed to manage these new technologies.
This concept holds true for robo advisors in the financial advisory. Smart robo-investing machines
will not replace traditional advisors but simply create demand for new skillsets for employees in
this workforce.vi In the near future I believe that robo advisors and traditional advisors will
converge for two main reasons. First is the fact that robo advisors have an online experience.
Being able to monitor your own investment portfolio at home from a computer is a major
accomplishment that robo advisors offer. Because of the onset of robo advisors, the future
generation is sure to choose robo advisors over traditional human advisors. To overcome this,
the traditional advisory firms need to catch up on their services and technology employed in
order to compete with robo advisors.
This leads into the second idea of why robo advisors and traditional advisors will unite. Since
young adults are just young adults they do not have the capital to invest in traditional advising.
“However as they start to grow older and need to manage 7-figure portfolios they will seek more
professional help. Robo advisors understand this and will be forced to add a human advice
component to keep assets from fleeing.”vii That being said these smart robo-investing machines
will not replace traditional advisors. Robo advisors manage assets worth about fourteen billion
dollars in total whereas traditional financial advisors oversee about five trillion dollars in assets.
As they continue to enforce the features that make them successful they will continue to grow.
Advantages of using Robo advisors
Keeping all the above points in consideration, following are the advantages of robo advisors:
1. Low fees: In comparison to the conventional financial advisors, they charge lower fees.
2. Low minimums: The investors who are starting new can easily capitalize through
investing in the robo advisory firms.

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3. Index-fund based buy & hold portfolios: Low cost index funds such as ETF’s are available
to the buyers. (Vanguard, iShares, Schwab, etc.)
4. Asset allocation Models: Models can be built and risk can be assigned by just answering
a few basic questions such as age, income, size of portfolio, etc.
5. Simple online reporting: The robo advisors can provide the fundamental service of
performance reporting and transactions as well as provide details of the position in the
financial market.
6. Portfolio rebalancing: A few robo advisory companies are specializing in portfolio
rebalancing to generate the best possible results for the client.
7. Tax-loss harvesting: The robo advisors can help maximize returns through tax-loss
harvesting.
8. Live online customer service: The users can easily contact the customer service in case if
they need any kind of support while working on a particular robo advisory website.
9. Basic goal-based planning: They are also capable of displaying the amount of money that
can be saved and that should be invested for reaching a particular goal.
Conclusion
In summary, we can say that robo-advisors handle virtually every aspect of investing. Once the
money is transferred to the account and various investing priorities are filled out by the client,
the service handles everything from rebalancing the investment portfolio to dividend investment
to tax savings. There have been quite a few robo advisory firms in the market and many more
are coming up with the coming years. The technology used to render this technology is rapidly
evolving with each passing day and becoming better with more complex algorithm. However,
since this concept of artificial intelligence is moderately new, the regulations and security
considerations are still in nascent stages. The SEC, OCIE and FINRA are working together tirelessly
to make robo advisors more secure and regulated in terms of cybersecurity and evaluation of risk
tolerance levels of the clients.
Robo investment advisors have made financing management services more accessible making it
more profitable for the firms and less expensive for the clients. Moreover, the technology
requires less investment as compared to the traditional investment advisors. In the future, we
expect that the traditional and robo advisors will unite to give advantages of both and give a new
dimension to the investment management techniques.

19. 18
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i https://www.betterment.com/security/
ii https://www.betterment.com/security/
iii http://www.investopedia.com/articles/investing/041015/future-roboadvisors-future-
advisor.asp
iv http://money.cnn.com/2014/08/20/news/economy/median-income/
v http://www.forbes.com/sites/emc/2014/01/09/smart-machines-shaping-the-workforce-of-
the-future/
vi http://www.gartner.com/newsroom/id/2605015
vii http://www.investmentnews.com/article/20140714/BLOG09/140719957/the-reasons-why-
human-and-robo-advisers-will-soon-converge