Robo-Advisors in Fintech: Reshaping Wealth Management With Automation

As technological advancements and global digitalization continue to reshape the financial industry, financial software development services have become increasingly popular. One of the most prominent innovations emerging from this transformation is robo-advisors. These automated investment platforms have revolutionized how individuals approach wealth management, making investing accessible, affordable, and efficient. Statista estimates that global assets managed by robo-advisors are expected to increase to $2.33 trillion by 2028

In this article, we will explore what robo-advisors in fintech are, how they work, and walk you through the process of creating a robo-advisor platform.

What is a robo-advisor?

In simple terms, robo-advisors are automated digital platforms that use algorithms to assist individuals in managing their investments and providing personalized financial advice. These platforms primarily utilize AI and machine learning technologies to make accurate predictions, create personalized investment strategies, and help you manage your finances more effectively. 

Overall, the services they provide are similar to those of human investment advisors, but they are more accessible to a wider range of investors. Many have no or low minimum account requirements, making it easy to open and manage investment accounts. This is especially beneficial for beginners or small investors. Moreover, the fees of robo-advisors are significantly lower than those charged by traditional advisors. 

As a result, the popularity of robo-advisors continues to grow. According to Statista, the number of users in the robo-advisor market is expected to reach 34 million by 2027.

How do robo-advisors work

As we mentioned, robo-advisors are digital platforms, so you can access them through a website or mobile app. They use complex algorithms and data-driven models to create investment strategies, so first of all, they need to collect the data. Here’s an overview of how a typical robo-advisor works:

• You start by creating an account on a robo-advisor platform. This usually involves answering some questions about your financial goals, risk tolerance, and investment preferences.
• Based on your answers, the robo-advisor uses algorithms to create a personalized investment portfolio for you. This portfolio is typically made up of different types of investments, like stocks and bonds.
• Once your portfolio is set up, the robo-advisor automatically manages it. This means it regularly buys and sells investments to keep your portfolio aligned with your goals and market changes.
• Robo-advisors continuously monitor your investments. If your portfolio gets off track due to market changes (for example, if one type of investment grows faster than others), the robo-advisor will rebalance it to maintain your desired investment mix.

Like traditional financial advisors, some robo-advisors are regulated by the Securities and Exchange Commission (SEC), which means they have a responsibility to act in your best interests regarding investment decisions. However, not all robo-advisors are registered as investment advisors; some operate under regulations applicable to brokerage firms.

Robo-advisors also typically insure accounts through the General Data Protection Regulation (GDPR) and the Securities Investor Protection Corporation (SIPC). This protects users against the loss of cash and securities if a brokerage firm fails, though it doesn’t cover investment losses.

Key components of a robo-advisor platform

Robo-advisor platforms offer a variety of distinctive features that set them apart in the realm of automated investing. Therefore, let’s take a closer look at their key components.

Risk assessment tools

Understanding an investor’s risk tolerance is vital for designing a personalized investment strategy. Robo-advisors employ sophisticated algorithms to assess risk through questionnaires that evaluate a user’s financial situation, investment goals, and comfort with market volatility.

For example, a platform may categorize users into different risk profiles (conservative, balanced, or aggressive) based on their answers. This tailored approach ensures that investments align with individual preferences and financial objectives.

Automated portfolio management

At the heart of a robo-advisor is its ability to manage portfolios automatically. This involves asset allocation, diversification, and regular rebalancing to maintain the desired risk level. Most robo-advisors use modern portfolio theory to optimize investment strategies based on historical data.

A good example is Wealthsimple. It is a popular robo-advisor that not only offers diversified portfolios but also integrates ethical investing options, allowing users to invest in socially responsible funds that align with their values.

Investor education

While robo-advisors simplify the investment process, they also recognize the importance of educating their clients. Financial literacy is a crucial component of effective investing, allowing individuals to make informed decisions about their money. Many robo-advisors incorporate educational resources, such as articles, videos, and webinars, to enhance their clients’ understanding of personal finance concepts.

Tax optimization

Many robo-advisors provide tax-loss harvesting, which helps minimize tax liabilities by strategically selling losing investments to offset gains. This feature can significantly enhance after-tax returns, making it an attractive component for investors.

For example, If an investor holds a stock that has decreased in value, the robo-advisor can sell it while simultaneously buying a similar asset to maintain the investment strategy. This strategy allows the investor to reduce their taxable income without significantly altering their portfolio’s risk profile.

Additionally, a robust robo-advisor platform provides comprehensive tax reporting features that summarize all relevant information needed for tax filing. This includes detailed records of gains, losses, and distributions, making it easier for users to prepare their tax returns and understand their financial positions.

Benefits of robo-advisors development

Robo-advisors offer a wealth of benefits, not just for the end-users but also for financial institutions that adopt or develop these platforms. Some of the key advantages include:

• Cost efficiency: Traditional financial advisors typically charge fees ranging from 1% to 2% of assets under management. Robo-advisors, on the other hand, charge significantly lower fees, often around 0.25% to 0.50%. 
• Accessibility: As we mentioned, robo-advisors are more accessible to a wider range of investors. These platforms allow individuals with modest savings to benefit from personalized financial advice, which was previously available only to wealthy investors. Additionally, robo-advisors operate primarily online, so you can access them anywhere with a phone or laptop and an internet connection.
• Scalability: Robo-advisors can handle a large number of clients simultaneously without requiring additional human resources. This scalability makes them ideal for financial institutions looking to expand their client base and serve more customers efficiently.
• Automation: Robo-advisors automate tasks like portfolio rebalancing, tax-loss harvesting, and performance tracking. This reduces the need for manual work, ensuring faster execution and minimizing the risk of human error.
• Customization: Clients can tailor their investment strategies based on their financial goals, risk tolerance, and preferences. Robo-advisors offer customizable solutions, which can lead to higher client satisfaction and loyalty.
• Data-driven decisions: With access to real-time market data and historical performance data, robo-advisors can make informed investment decisions. These platforms continuously analyze data, enabling them to optimize portfolios and respond to market changes swiftly.

Creating a robo-advisor platform step-by-step

Developing a robo-advisor platform is a complex task that requires careful planning, technical expertise, and compliance with regulatory requirements. Therefore, it’s best to entrust this work to a skilled financial software development service provider. 

Nevertheless, let’s discuss the development of the robo-advisor platform in detail. Here’s a step-by-step guide to navigate the process:

Research and define your niche

Before diving headfirst into the development of your robo-advisor platform, it’s crucial to conduct thorough research to define your niche. Here are some points to consider:

• Identify your target audience. That’s the very first step in building a successful robo-advisor. Understanding your audience will help you tailor your services effectively. Consider demographic factors as well as investments experience and risk tolerance. For example, if your target market is younger investors, you might focus on low-cost ETFs and education around sustainable investing. 
• Analyze competitors. Take a close look at existing robo-advisors in the market. Platforms like Betterment, Wealthfront, and Acorns have established themselves by offering unique features. Identify gaps in their services or areas where you can improve. 
• Define the Unique Selling Proposition (USP). What will set your robo-advisor apart from the competition? This could be anything from lower fees, superior customer service, or advanced algorithms that provide better investment strategies. 

Choose the right technology stack

The technology stack you choose will impact the scalability, security, and performance of your platform, so choose wisely. Select the programming languages, frameworks, and tools that will support your application.

Common programming languages for backend development include Python, Java, and Ruby. Python is particularly popular for financial applications due to its simplicity and the availability of libraries such as NumPy and Pandas for data analysis.

Design your platform

A seamless user interface is the cornerstone of any effective robo-advisor platform. Users should be able to navigate the platform easily, whether they are seasoned investors or novices. A clean, intuitive design enhances the user experience, allowing clients to access their accounts, view investment performance, and adjust their portfolios effortlessly. Additionally, mobile compatibility is crucial, as many users prefer managing their investments on the go.

Make a strong brand identity that will differentiate your robo-advisor in the market. Creating a logo, choose an appealing color palette, and typography that will resonate with the target audience. For instance, a robo-advisor aimed at younger, tech-savvy investors might use a modern design with bright colors and engaging visuals to attract attention.

Create the core algorithms

Develop and implement the foundational algorithms that will serve as the core of our system. These algorithms dictate how the platform will analyze data, create investment strategies, and provide recommendations. 

Ensure security and compliance

Since robo-advisors handle sensitive financial data, robust security measures are non-negotiable. Implement strong encryption, secure APIs, and multi-factor authentication to protect client data. Additionally, your platform must comply with local and international regulations, such as the SEC’s guidelines in the US or MiFID II in Europe.

Test your robo-advisor platform

Once the core algorithms are in place, it’s essential to conduct thorough testing to ensure that the platform functions correctly and meets regulatory standards. Assess how the platform performs under various conditions, including peak usage times and stress scenarios. This ensures that the system can handle high volumes of transactions and data without compromising performance.

Launch and monitoring

Once testing is complete, the platform is ready for launch. Release your robo-advisor platform, but don’t forget to monitor it closely to ensure it’s working correctly. Keep track of performance, identify any issues, and make sure it handles user traffic efficiently.

Challenges you might face

While robo-advisor platforms offer significant potential, they also come with their share of challenges:

• Regulatory compliance: Financial regulations are complex and vary across jurisdictions. Robo-advisors must navigate these regulatory environments to ensure compliance with laws like GDPR and the SEC’s Investment Advisers Act.
• Data security: Cybersecurity threats are a constant concern for any fintech platform. Breaches can lead to the loss of sensitive financial data and damage to your platform’s reputation.
• Building trust: Robo-advisors need to convince users to trust their algorithms with their hard-earned money. This can be a hurdle, particularly for older or more conservative investors who are accustomed to traditional financial advisors.
• Technology development: Developing sophisticated algorithms and a secure, user-friendly platform requires substantial investment in technology. Fintech development is expensive, and getting it right is critical to success.

Costs of developing a robo-advisor platform

The cost of developing a robo-advisor platform depends on several factors, including the complexity of the platform, the technology stack, and the features offered. Overall, It can range from $35,000 to $300,000 or more. And that is not all. Some robo-advisors opt to license existing financial algorithms or data feeds, which can add to the development costs. Licensing fees vary based on the provider and the scope of services. Moreover, maintaining a robo-advisor platform, updating algorithms, ensuring security, and adding new features requires ongoing investment. 

Conclusion

Robo-advisors have revolutionized the world of financial services by making professional investment management accessible to the masses. Their rise represents a significant shift toward automation and data-driven decision-making in fintech. However, developing a successful robo-advisor platform requires careful planning, technical expertise, and a clear value proposition.

Therefore, it’s better to entrust the task to a reliable fintech software provider, such as SoftTeco. With over 15 years of experience, we have extensive expertise in financial technology development. Our skilled team is equipped to manage the entire development process, from initial concept to deployment, ensuring that your robo-advisor platform meets all regulatory requirements and user needs. If you’re unsure where to start, we also offer consultation services to help you define your project goals and identify the best strategies for success. Partnering with SoftTeco means you gain a trusted ally committed to delivering innovative and effective fintech solutions tailored to your business needs.