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Automated investing is a broad term that encompasses a host of various financial services, investment strategies, and other elements of financial advisory that incorporate the use of technology – specifically, algorithms, mathematical models, and AI – in deploying their services.
It runs the gamut of everything from high-frequency trading to other forms of algorithmic trading. One of the most common ways that automated investing that is being deployed to retail investors is robo-advisory.
With the advent of fintech, and consumer finance mobile and online applications, robo-advisory services have become a mainstay of the finance industry. It has allowed investment platforms both large and small to deploy services to clients from onboarding to tax minimizing and everything in between.
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While both terms are used interchangeably, they are related but not necessarily the same. As noted above, automated investing is a broad term that includes a slew of activities and services.
Robo-advisory is a subset of automated investing. It too relies on AI and algorithms to offer an array of investment options to clients. What distinguishes robo-advisory is that it meant to provide personalized investment advice and portfolio management.
It may include some human advisors in a hybrid capacity. Robo-advisors are primarily geared towards retail clients (as opposed to high net worth and institutional clients). As such, they tend to focus on passive investing strategies, such as mutual funds and exchange-traded funds (ETFs), to create a diversified portfolio.
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Automated investing cover a host of services, depending on the platforms that offer it. The primary offering is providing recommendations on a particular investment strategy or portfolio management that is accommodating to the specific user through robo-advisory.
Generally, these robo-advisors have a pre-built portfolio and has to match it to the right retail client. This matching happens when a client is onboarded to a platform. They are typically given a questionnaire that’s designed to gauge their investment goals, time horizon and risk appetite.
Based on this profile, a robo-advisor makes personalized recommendations of an investment strategy that works for the client.
These include various instruments and asset classes (that are typically diversified), with credit ratings and performances that meet the client’s risk profile and a timeline to exit based on their goals and time horizon.
Once the client has chosen the option that works best for them and deposited the funds into an account, the robo-advisory then automatically allocates the funding between the selected assets and executes on the trades.
The algorithm will conduct these trades until the funds are allocated based on the chosen portfolio option and if the portfolio drifts from the desired allocation owing to market fluctuations, it will automatically trade in and out of assets to rebalance the portfolio and return it to the chosen allocation.
It will also provide constant monitoring of the markets and the portfolio to ensure that it remains in line with the chosen strategy.
The actions of the robo-advisor and the portfolio can be monitored by the client via the online platform and can intercede if needed. Platforms also have customer support networks available if the client requires further assistance.
As online fintech platforms grow and look to onboard more clients – some of whom may not be totally sold on the idea of a bot making investment decisions on their behalf – they have come to develop a host of services that may not entirely be reliant on robo-advisors. This range includes:
These are strategies that are designed to achieve a specific goal for the client, including retirement and homeownership funding. These also include tax optimization strategies that seek to design an investment strategy that minimizes capital gains and other taxes.
Some clients will want to ensure that their investment is having a positive impact, whether it is by guarding their portfolio against environmentally harmful companies, or ensuring that their investment is Shariah-compliant.
Platforms that offer these services allow clients to deploy disposable funds, including their spare change, into a automatically-managed portfolio
While the majority of offerings to retail clients are passive investing strategies, those with an a higher risk tolerance may wish to adopt an active approach to investing.
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Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
