The term ‘robo-adviser’ was coined by Richard J. Koreto as the title of an article he wrote for Financial Planning Magazine in 2002. In recent years it has been widely adopted as the standard term to describe financial advice processes that are:

  • Automated, with little or no human interventions
  • Delivered online
  • Self-service
  • Use algorithms to match portfolios to clients, based on assessed risk tolerance and other factors such as age, etc.
  • Confined to relatively simple portfolio construction matters

Robo-advisers are good at producing this process driven investment recommendation and implementation and excel in situations that are simple and where the variables are common enough to be factored into an algorithm.

At this stage, robo-advisers do not generally stray into more complex scenarios involving complicated financial advice such as cash-flow management or retirement income planning. The variables for these products are considered to be so wide, complex and random that they defy being easily coded into algorithms that produce meaningful results. It seems also that in more complex scenarios, people value human interaction which allows for live explanation of concepts with specific answers to specific questions about their own unique circumstances.

The USA is the epicentre of the robo-adviser boom due to its highly developed technological sector together with the right regulatory approach to allow them to flourish. The US is a unique marketplace because of the advice gap that exists where many lower-wealth investors do not have access to any kind of financial advice. Robo-advisers are seen as a way to provide low cost financial advice to this sector.

In the UK and Europe, robo-advisers are not so well established because of the strict financial regulations.

To date, the boom for robo-advisers has really been in public relations, as the financial press and mainstream media highlight all the advantages from the customer perspective. However, their market share is tiny at less than 1% of Assets under Management. Like all disruptive technology, robo-advisers will shake up the market and change financial services distribution in ways it is hard to imagine, just like the internet did 20 years ago.