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Combined the introductory paragraph and the definition section

Robo-advisors' or robo-advisers are a class of financial adviser that provide financial advice or investment management services online with moderate to minimal human intervention. Robo-advisors are also defined as "a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms". These mathematical algorithms are designed by financial advisors, investment managers and data scientists, which are further coded in softwares by programmers. With the use of softwares in suggesting clients, the role of a human advisor is no longer needed. The software utilizes its algorithms to automatically allocate, manage and optimize clients' assets.

There are over 100 robo-advisory services. Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience with lower cost compared to traditional human advice. Robo-advisors typically allocate a client's assets on the basis of risk preferences and desired target return. They typically employ passive investment approach and invest in ETF's and mutual funds using Modern Portfolio Theory. While robo-advisors have the capability to invest in individual assets like stocks, bonds, and commodities they generally follow an index-fund type investment strategy. Clients can choose between offerings with passive asset allocation techniques or active asset management styles.

In different countries they are also referred to as "automated investment advisor", "automated investment management", "online investment advisor" and "digital investment advisor".

Methodology (New information added)

Robo-advisors are simply computer programs designed by software programmers that fit the requirements of a fund manager and the particular fund. They perform passive investing like putting money in one or many pre-selected ETF’s.

The process begins with registration by transferring minimum amount to open an account and providing unique Tax Identification Number (TIN) and a valid ID proof. The client is asked to fill a questionnaire to understand their risk and investment preference. Some categories of questions asked are:

• Personal Status: Age, Job, Income, etc.
• Goals: Retirement, saving for children, buying a house or car, college savings, etc.
• Investment Preference: investing in Technology, Real-estate, U.S. funds, emerging markets, stocks, bonds, etc.
• Ethical preference: investing in clean energy companies, gender equality companies, carbon-neutral companies, diversity driven companies, etc.

Further the application suggests specific portfolios fitting the needs of the client. For example, a technology-centric fund, IRA fund, clean energy fund, REIT fund. The client can choose from one or more portfolios to invest in after they confirm the split of capital in stocks and bonds.

Many robo-advisors use Modern Portfolio Theory (MPT) to design portfolios. MPT allows diversification by investing in a wide range of assets like “not putting all eggs in one basket”. Consequently, risk is minimized and returns are maximized. If one investment goes down the other will go up giving the portfolio steady upward trend.

Additional features offered by robo-advisors include automatic portfolio re-balancing, tax-loss harvesting, reporting investment performance, collecting and reinvesting dividends, etc.

Robo-Advisors v/s Human Advisors (New Section)

While robo-advisors provide an ETF based fund, human (financial) advisors allow for customization of portfolios. Robo-advisors choose ETF’s and perform passive investing while financial advisors’ advice on complex goals like entire life financial planning, insurance and estate planning. Financial advisors may use software to select investments but they offer much more tailored options in all kinds of liquid and illiquid securities.

Financial advisors charge higher fees for their expertise, management, and ability to execute. On the other hand, robo-advisors charge lower annual management fees of 0.25% to 0.5%, relatively less than 1% Assets under management (AUM) per year charged by financial advisors. For example, on a $1 million investment, robo-advisor fee would be $2500 while financial advisors would charge $10,000.

Financial advisors possess knowledge on executing trades. Clients can invest in individual stocks and bonds while this feature is not available with robo-advisors. Robo-advisors often stick to simple strategies like investing in 80% stocks and 20% bonds with little tweaking of proportions available. Whereas, financial advisors possess the ability to solve complex financial situations like dividing assets in a divorce, complicated tax situations, or paying large amounts of debt, etc.

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