October 04, 2024 (MLN): Traditionally, investment decisions were made by financial advisors, but the rise of Robo-Advisors is now transforming the industry. Tasks such as portfolio design, diversification, rebalancing, and even stock selection, once the domain of human expertise, are now increasingly managed by advanced algorithms and technology.
Robo-Advisors are digital platforms that offer automated, algorithm-driven financial planning and investment management with minimal human involvement. Using advanced algorithms, they construct and manage diversified investment portfolios tailored to individual/institutional financial goals, risk tolerance, and time horizon.
Robo-Advisors are already in use across countries like USA, UK, Germany, Canada, Hong Kong, and Singapore. According to a fair estimate, assets worth of was of USD 1.11 trillion were under management (AUM) of Robo-Advisors in 2023, a figure that continues to grow and is expected to reach USD to 1.87 trillion by 2028 (Fig. 1).
Less developed countries are also in the process of adopting Robo-Investing. In Pakistan, it is no longer an unfamiliar concept. For instance, a faculty member of a private university in Pakistan, is currently engaged in a research project meant to assess prevalence of the concept within existing and potential investment professionals. Further to this, the writer was contacted by a group of students from another private university to facilitate on calculating the feasibility of working on an investment application software that may provide personalized investment advice to individuals based on an individual’s financial situation.
Although Pakistan is not yet ready to adopt Robo-Advisors on an institutional or individual level, the question remains: how longer can Robo-Investing be kept out of the investment landscape?
With internet banking thriving, electronic stock trading rising, and the metaverse on the horizon, there certainly exists a strong case for utilizing Robo-Advisors both at individuals and institutional level.
The country is fortunate to possess all the essential components needed to successfully launch Robo-Advisory services. Managing investments right from inception to excellence.
We have the financial databases Robo-Advisors need to make informed decisions, familiarity with algorithm-based trading, the skills to converge isolated data into relational databases, and the expertise to develop and codifying of operational frameworks to facilitate Robo-Advisors to perform in line with investors’ return objectives and risk tolerance.
The operational and economic benefits of having Robo-Advisors are numerous, including cost-effectiveness, convenience, accessibility, personalized portfolio design, efficient & transparent transactions, and automatic rebalancing. However, one of the most impactful advantages, to us and all developing countries, is the educational opportunity it provides.
In regions where resources, intellectual and physical, to develop comprehensive e-investment platforms are limited, Robo-Advisors are blessing, as they come with built-in educational resources and financial tools that help investors improve financial literacy, thus better understanding of Portfolio Investments.
Now, we must decide whether to design and develop our own indigenous Robo-Advisors or opt for an off-the-shelf solution that is readily available.
If we choose the latter option, there are numerous off-the-shelf applications available. On the lower end, platforms like Betterment and Vanguard Digital Advisor cater to everyday investors and beginners, while more advanced options, such as Wealthfront, offer comprehensive financial planning for more sophisticated users.
Robo-advisors have their own limitations, the most significant one is that they are not well-suited for individuals with more complex financial needs that require personalized, in-depth advice.
Limitations never be allowed to overtake Advantages
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