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Why will the Global Robo Advisory Market grow in the next 5 years?

Robo advisory (RA) is a tool that provides algorithmic financial planning services through various stages of automation and personalization. The core idea was to give individuals their freedom of choice back by reducing management fees for their passive investments while still being able to match market returns. By opening up investment opportunities for retail investors with minimal or no human intermediation, RA has evolved to democratize finance with significant advancements in AI.

Although robo advisor technology has been in use since the early 2000s, the global robo-advisory market has recently witnessed significant growth. There has already been an increasing demand for efficient investment options among retail investors since the 2008 market crash, and the pandemic exacerbated the need. In addition, risk assessment measures have become more stringent over time, leading to higher costs associated with traditional financial advisors’ fees than the fees charged by automated investment platforms such as robo-advisors.

As a result, the global RA market is expected to snowball over the next five years, fueled by a growing investor base and increasing investments in AI/ML. The global robo-advisory market is anticipated to grow tremendously by 2028, at a high CAGR of 39.9%. Such steep growth is anticipated mainly due to product advancements and acquisitions by key market players. 

Here are the top reasons why RA is optimally positioned to add value to the world of financial instruments and motivate people to value investing through strategic savings.

Risk assessment measures

The main advantage of robo-advisory is that it allows investors to focus on their own goals while taking advantage of the expertise and experience of a professional portfolio manager. While such an approach has existed in some form since the early days of mutual funds, technology has only recently allowed automated investment management systems to expand into areas such as wealth management. Robo advisers use algorithms based on behavioral finance principles (e.g., heuristics) for risk, return, and allocation decisions in each client’s portfolio. RAs provide more affordable solutions than existing human-led financial advisors or traditional investment products such as ETFs or mutual funds.

The facets of risk assessment, namely qualitative and quantitative, cannot be ignored when evaluating a safe investment scheme. As stated above, the qualitative aspects surround the behavioral quirks of the investor that are defined by their goals. RAs have been successful in capturing heuristics through entry surveys. In contrast, the quantitative aspects of the risk are driven by an investor’s risk appetite. The same can be assessed through measures such as VaR and other cyclical indicators that predict market volatility and sentiment. These are still being incorporated into the RA algorithms to make them more robust across market conditions and investor bias.

Expanding investment avenues

Thematic investing with RAs is one of its many use cases that can be chosen by an investor at the very beginning or given a preference so that the portfolio can be rebalanced accordingly. A standard format for retail investment is through a systematic investment plan (SIP) to benefit from the principle of dollar cost averaging and avoid having to time the markets.

  • Globally, governments and environmentally and socially conscious young investors have taken strong preference for ESG as an investment avenue as it promises sustainable growth by mitigating non-financial risks for businesses.
  • Cryptocurrencies are currently the riskiest investment option as they remain unregulated globally. However, digital currency is the future and will be worth exploring over time if you do not have any exposure to this sector yet.
  • Investing in global stocks is a fast-emerging investment option for domestic retail investors to diversify their portfolios by investing in multiple companies across various sectors such as consumer goods, technology & IT (T&I), healthcare, etc.

Growing investment demand in the Asia-Pacific

The investor base is growing in the Asia-Pacific region (the number of affluent people holding 86.8% of the liquid assets has doubled in the last decade), in addition to the growing uncertainty in the developed markets and the dollar’s depreciation. With the associated risks of recession, geopolitics, inflationary pressure, and the global energy crisis continuing to add to macroeconomic uncertainty, investors must change how they value assets, find investment opportunities, and manage risks.

The robo-advisor market benefits from a favorable regulatory environment that provides flexibility in automating risk management. In addition to this major contributing factor to the growth of this market in the coming years, the market is also driven by the increasing demand for automated solutions from corporate clients in APAC. The RA market has been growing at an accelerated pace, especially in countries such as Australia, India, and China, where there is an increase in technology sector investments.

Advancements in AI/ML

Machine learning has already played an enormous role in making RA more efficient since its inception. RA cannot be just thought of as an auto-pilot investment service because it can be of various types, such as fully automated, hybrid, or suggestive.

RA 4.0 marks its expansion in the wealth management category, which involves self-learning algorithms capable of investing and portfolio rebalancing, driven by advances in AI. Intelligent conversational agents use NLP to guide users through business processes, while other AI components like predictive analytics or intelligent customer segmentation impact the quality and depth of advisory content.

The next step is integrating more advanced technologies like blockchain, AI, robotics, and other emerging technologies into the Robo Advisory platform. With the help of these emerging technologies, financial advisors can offer better services at lower costs.

Data is gold in this digital age, and the more data there is, the harder it is to manually identify trends. But computer algorithms are meant to crunch numbers that allow investment advisors, be they humans or bots, to provide value by allowing custom solutions based on inferences from historical data. Fibonacci retracement, a widely used technical analysis indicator, is based on the principle of prices returning to previous resistance and support levels. The potential of AI to reach a level of sophistication so as to provide such insights without a knowledgeable operator is where the RA industry is headed.

The hype is real

The availability of different types of robo-advisors for high-net-worth individuals is expected to make the HNI sub-segment of the market the most dominant one. The sub-segment of pure robo-advisory, such as digital-first and boutique institutions, is expected to grow at the highest rate. 

It seems evident that the RA market is growing rapidly, and there are many opportunities for companies and professionals looking to enter this field. And a niche area to target in the market can be building custom solutions for the low income class of society to ensure that the growth of RA doesn’t induce higher inequalities.

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