robo advisors

How can robo-advisors make money?

Dawid, Business Development Manager

Can robots make money? Until recently it sounded like a science fiction question, but not anymore! The largest robo-advisor consultancy already exists in the USA and it has gained immense popularity. Now the time has also come for Europe - where these smart robots have begun to arise.

Get Definition

Robo-advisors are a form of digital consulting platform used in the areas of ​​investment, loans, insurance services, and many more. The solution is based on advanced algorithms that use mathematical rules for analyzing large data sets (Big Data). Robo-consulting reduces the costs of advisory services, making these services available to a wider range of clients. The software utilizes its algorithms to automatically allocate, manage and optimize clients' assets.

How to make money

The most common way to earn money with robo-advisors is through a wrap fee, which is based on assets under management. In the finance industry robo-advisors can also make money by marketing targeted financial products, such as mortgages, credit cards, insurance politics, or simply cash management. In other industries, robo-advisor can be easily used to benefit from selling products (based on suggestions or proposing new premium features).

How do robo-advisors help clients?

Robo-advisors choose and present a personalized offer based on a detailed analysis for each specific client. It is formed on a survey containing questions about, the client's current financial situation and his plans for the future.
Robo-advisors offer users an easy and intuitive process of setting up an account, as well as a simple and functional service in the future. Goal planning and portfolio management are also key factors. 

Selling Products

Robo-advisor as mentioned above can sell some new features and products. Instead of charging clients a blanket rate for services they won’t ever utilize, robo advisor uses its algorithm to provide a customized offer of the next product or next level of services. Robo-advisors can also earn money by selling premium features. The sale can be easily preceded by presenting new similar products or promoting third-party products. This possibility also applies to services.

Selling Ads

Some robo-advisors might sell ad space on their apps or websites, enabling clients to see only related and relevant ads. The robo-advisors might sell the ad space for a flat rate or charge accordingly to the number of clicks or sign-ups.

Finance Management

Some robo-advisors offer loans in addition to money management. Like traditional firms, robo-advisors charge an annual management fee, usually a percentage rate of current assets under management. The average annual management fee for robo-advisors can fall anywhere between 0% to 0.75%. Most of the time, these annual account fees are lower than traditional human advisory services.

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Lower Fees than human advisors

While traditional (human) financial advisors typically charge 1% or more per year of assets under management, most robo-advisors charge around just 0.25% per year. Robo advisors are able to charge lower fees because they use algorithms to automate trades and indexed strategies that utilize commission-free and low-cost. Because they charge lower fees, however, robo-advisors must attract a larger number of smaller accounts to generate the same revenues as a pricier advisor.

Low entry barriers and better scalability

The ease of providing services by robo-advisor translates into much better scalability. Unlike traditional financial advisors, with this technology, there is virtually no upper limit to the number of assisted clients. This also translates into reaching a new type of client — a person with smaller financial resources.

So far, the market of financial advisors has been based on the best use of the working time of a given advisor, therefore the number of clients had to be limited. Currently, each client can manage their account with an automated financial advisor under the same conditions as others.

The flexibility of the service also contributes to the popularity of robo-advisors. You can manage it from anywhere in the world, at any time of the day, from the level of the application.

Customers want to take an action

Up against galloping inflation and incoming crises, taking care of your finances is even more important than ever before. Using bank deposits is not always profitable. In most cases, banks' offers are not favorable enough to make opening a deposit a proper tool to protect us against inflation.

Customers are becoming more and more aware and willing to act. Investing by yourself is an approachable plan to secure your finances. However, without proper knowledge and experience, it carries significant risks. Using robo-advisors is much more effective than making deposits, and also safer than investing on your own.

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