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  • FinTech
  • Naveen Joshi
  • JUL 16, 2019

Robo-advisors: the next phase of fintech evolution

The deployment of robo-advisors in fintech will offer effective financial advice and automate asset management, investments, and insurance claims processing.

Generally, people consult financial planners and advisors for different investments and major financial decisions. However, financial advisors may offer biased or inaccurate advice and charge expensive consultation fees. Additionally, in today’s time and age, we prefer handling multiple tasks online. Hence, using robo-advisors for financial needs is also quite natural. Another group that can benefit from the advent of robo-advisors in fintech is the retirees from the generation of baby boomers. Compared to financial advisors, robo-advisors are inexpensive and more accurate in allocating assets, estate planning, and overall financial advice. Robo-advisors help private investors in wealth management with the help of predefined algorithms and trends in the financial market. The utilization of robo-advisors in fintech is not a new phenomenon. Wealth managers have been using robo-advisors behind-the-scenes to gain additional information before offering their final recommendation to clients. As robo-advisors became more advanced, wealth managers were able to focus more on building client relationships and save time spent on data entry and investment management. Robo-advisors can be of three types:

  • Full-service robo-advisor: A full-service robo-advisor can help in all aspects of various investments. It can suggest an investment strategy, take over asset management, and rebalance investment structures.
  • Half-service robo-advisor: A half-service robo-advisor can only suggest investment products to help in the development of investment strategies.
  • Self-service robo-advisor: A self-service robo-advisor only offers tips for financial investment to private investors.

Applications of robo-advisors in fintech

The introduction of robo-advisors in fintech can benefit investors and financial services in the following ways:

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Customer onboarding

One of the primary functions of a robo-advisor in fintech is automated customer onboarding. Robo-advisors collect vital data such as personal information, investment goals, and experience in wealth management through a detailed questionnaire. After obtaining all the required data, robo-advisors will analyze it using deep learning. Robo-advisors evaluate finances, risk tolerance, and investment strategies to maximize gains. Based on accurate analysis, robo-advisors create customized portfolios. Robo-advisors offer critical wealth management advice and suggest investment strategies and services for customers.

Asset allocation

Asset allocation is the process of selecting suitable investment strategies based on a user’s risk tolerance. Robo-advisors utilize predefined algorithms to determine the type of asset allocation. For instance, higher portfolio risk may be more suitable for investing in stocks whereas, lower portfolio risk may be suitable for investing in fixed income products. In this manner, robo-advisors in fintech decide the most suitable asset allocation technique based on predefined models.

Robo-advisors in fintech can also help in rebalancing asset allocation. A customer’s specified percentage of investment in stocks and fixed incomes can change due to factors like reinvestment of dividends. Then, the customer may wish to rebalance their asset allocations. For instance, a user has an asset allocation with 40% fixed incomes and 60% stocks. However, their asset allocation changed to 30% fixed incomes and 70% stocks due to reinvestment of dividends. In this scenario, the user may wish to rebalance to their original allocation structure to avoid risks. Robo-advisors can suggest techniques for rebalancing asset allocation of their clients.

Balance projection

Robo-advisors in fintech can estimate and predict how the portfolio balance of a customer would look like if the customer invests according to its strategies. For this purpose, robo-advisors analyze investment strategies and potential risks to understand their impact on personal finances in the future. Robo-advisors can make portfolio balance data more visually appealing by presenting a balance curve based on mathematical function development or static growth. For example, 60% investment in stocks and 40% investment in fixed income may increase the portfolio balance by 3%. Alternatively, 40% investment in stocks and 60% investment in fixed income may increase the portfolio balance by 4%. With this approach, robo-advisors in fintech can help users compare different investment strategies and determine the most suitable one. Hence, users can develop a data-driven approach towards wealth management with the help of robo-advisors.

Insurance

Selecting the right investment policy and filing insurance claims can be extremely complicated. Generally, insurance policyholders may contact an insurance agent for insurance claims. Moreover, insurance claims processing requires multiple documents and the entire process can be time-consuming and tedious.

The introduction of robo-advisors in fintech can simplify insurance procedures right from selecting insurance policies to issuing insurance claims. Robo-advisors ask a series of questions to potential policyholders for gathering vital data. With the help of accumulated data, robo-advisors can suggest personalized insurance policies to the users. Additionally, in case a customer already has insurance coverage, then the robo-advisor can help switching to a similar insurance policy and secure a refund, if possible. Robo-advisors can also accept insurance claims and process them autonomously. This approach of claims processing can be quicker than the traditional one. Some robo-advisors have managed to process and pay for claims within seconds.

Taxes

In the state of South Carolina, individuals get a $50 tax deduction when they donate a dead deer to underprivileged people. Thanks to robo-advisors, people don’t need to move to South Carolina and hunt deer for tax deductions. Robo-advisors can help customers reduce the impact of taxes. As overall wealth increases, even small taxation rates can prove to have a magnified effect. Therefore, the right combination of investments from a tax perspective can be feasible in reducing taxes substantially. Robo-advisors can analyze personal income and the value of estate to suggest suitable investment strategies. With this approach, the utilization of robo-advisors in fintech can enable tax savings.

Retirement planning

According to reports, 67% of Americans believe that they will outlive their retirement savings. Retire planning is a crucial aspect of wealth management that requires several documents for balancing taxes, managing income requirements, and estate protection. In case of high net-worth individuals, the entire process of retirement planning can be complicated due to various business investments and assets. Hence, everyone needs a financial advisor for retirement planning. The advent of robo-investors in fintech can simplify the process of retirement planning. Robo-investors can easily access each user’s portfolio to get an accurate estimate of their finances. Robo-advisors can analyze market trends to suggest an approach that would ensure maximum returns. Additionally, robo-advisors can help in movements of securities to streamline the entire process.

Estate planning

Estate planning is a complex process involves preparing for probate, inheritance, disabilities, asset protection, and tax planning. For this process, estate owners have to evaluate the value of several assets that they own and decide the power of attorney. This process can be increasingly complicated for high net-worth individuals, who own multiple valuable assets such as artworks, properties, businesses, and luxury vehicles. Attorney’s and financial planner’s fees are another concern during estate planning. The adoption of robo-advisors in fintech can streamline the entire estate planning process. Robo-advisors can access each user’s portfolio to evaluate the value of their estate. After accurate evaluation, robo-advisors can help in developing wills to simplify the procedure. Also, robo-advisors can suggest a suitable type of insurance based on the assets that a user owns. Robo-advisors can also help in asset protection and planning for disabilities and terminal illnesses.

The adoption of modern technologies like AI, blockchain, and IoT have transformed various industry sectors such as retail, healthcare, production, and marketing. Similarly, modern technologies are evolving the world of finance. The adoption of AI-powered robo-advisors in fintech will become a norm. Reports suggest that total assets worth $1 trillion will be managed by robo-advisors by 2020. Therefore, financial services must deploy robo-advisors to streamline various financial procedures.

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