The financial sector in the United States has also undergone some change particularly with the entry of fintech firms that deal in robo-advisory. These fintechs employ the use of analytical tools such as algorithms and machine learning to give the investors an easy and effective way of investing regardless of their level of experience.
This article will discuss the rise of automated investment fintech companies in the U. S., what defines them, and how they are changing the investment industry.
The evolution of automated investment platforms
Robo-advisory, which is a form of automated investment services, have become popular ways of investing money. It was born in the period after the financial crisis of 2008 when investors and global citizens called for more openness and inexpensive ways of investing.
Such services in the past were regarded as costly and elite, with many firms demanding a minimum deposit of thousands of dollars and high fees. Fintechs in the investment space solved these challenges by providing cheap, convenient, and easy-to-use applications.
These fintechs employ various techniques in developing and administering investment portfolios based on the investor’s characteristics. The process normally starts with a questionnaire to determine the investor’s risk profile, objectives, and time frame.
According to the answers given by the respondents, the platform suggests an investment portfolio with low-cost Exchange Traded Funds (ETFs) or other securities. The automation also includes tax efficient management of the portfolio through continuous rebalancing and tax loss harvesting.
Automated investment platforms have gained a lot of prominence in the last ten years. Today, Betterment, Wealthfront, and Vanguard Personal Advisor Services are well known, managing hundreds of billions of dollars in AUM.
The popularity of the robo-advisory services has also attracted the attention of the conventional financial institutions to launch their own robo-advisory services thus making automation an integral part of the investment business.
Key features of automated investment fintechs
This paper identifies affordability as one of the endearing features of automated investment fintechs. As opposed to conventional financial advisors who may demand an annual fee of between 1% and 2% of AUM, most robo-advisors will demand charges that fall between 0. 25% and 0. 50%.
This is especially important because it means that the investment becomes more affordable, which will attract more investors, especially those who are young and those who manage the smaller amounts of money. Moreover, most of the robo-advisors have low or zero minimum investment amounts to enable more investors to access the services.
One of the major characteristics of these platforms is that they are designed around the user. Automated investment fintechs are easy to use as they are built to be very simple for investors to use and set up their accounts.
The most common features of the platforms are the dashboards that offer real-time information on the portfolio and transactions, besides offering other services such as financial advice. The mobile apps, therefore, go a step further in increasing the convenience of the users in monitoring and managing their investments.
Also, it is essential to have automatic portfolio management and rebalancing capabilities as an advantage. Robo-advisors keep on checking the market condition and rebalance the portfolios in order to meet the client’s objectives and risk profile.
This makes it easier for the investors to avoid the role of having to constantly rebalance their portfolios as this can be quite cumbersome and time consuming. Besides, there are features such as tax-loss harvesting that can help the investors in reducing their tax incidences and thus increase the after-tax returns.
The impact on the investment industry
Automated investment fintechs have emerged which has brought significant change in the investment industry. Perhaps the most significant shift is the shift towards the mass investing. These platforms have brought down the costs and made it easier for people to get into the investment business and therefore more people are able to access the financial markets.
This derives from the notion of inclusiveness that has been realized in such a way that investors of all ages, income, and other demographic characteristics can be included. Robo-advisors have also affected traditional financial institutions in one way or another.
Most have realized that the existing trends cannot be overlooked and have either created their own AIPs or have engaged with other fintech firms. For instance, in 2015, Charles Schwab Corporation launched its robo-advisor named Schwab Intelligent Portfolios; other firms have also included the robo-advisory feature in their services to improve their value proposition.
Future prospects and challenges
Future trends for automated investment fintechs are positive, and the industry is likely to expand and evolve in the future. It is believed that the AI and machine learning will improve the functions of these platforms and offer better and more effective investment solutions for the clients.
Other areas of future growth include the consideration of ESG factors into investment decision making since more and more investors want their investments to reflect their values. Nevertheless, the industry has its share of problems.
This is because the market for automated investment services will most probably attract more regulatory attention as it grows. Adhering to the changing legal frameworks when implementing those platforms that will still be effective and economical will be challenging.
Moreover, the market is expanding and is characterized by increased competition with new market players joining the market from time to time. New entrants will pose a threat to established firms and the latter will have to come up with new strategies to counter them.
Thus, the US investment market has been revolutionized by the fintechs that focus on automated investment services. This has made investing cheaper, easier and faster and has brought the investment industry to the common man, thus setting high standards for others to follow.
With the increasing innovation in the industry, there are still great opportunities for automated investment fintechs in the future due to the improvement of technology and the increasing need for organizations which provide financial services.
Yet, some critical issues, such as the management of the regulatory environment, the preservation of investors’ confidence, and the promotion of innovation, will define their further evolution.