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What are Robo Advisors: How Artificial Intelligence (AI) Automates Trading

2022-08-17 08:58:36


  • Robo advisors are a type of software powered by big data and AI used by investors to automate their trades, offering a more cost-friendly alternative to expensive human financial advisors.
  • A robo advisor is not the same as an automation bot; robo advisors can be trained based on a person’s individual goals in the markets, and possess the ability to become more intelligent with new data.
  • Robo advisors are used more frequently in the stocks & commodities markets ($1+ trillion in assets are currently managed by robo advisor) compared to crypto, due to the volatility in the crypto space.

robo advisor

Financial advisors traditionally steered investors in the right direction by telling them how to invest their money. The issue is that financial advisors charge hundreds of dollars per hour; making them affordable only for high networth individuals.

If the average Joe wanted to invest, he would not be able to afford a financial advisor; his only option is to test the waters on his own. This is why most retail investors end up at a loss; they lack professional supervision and guidance.

As technology advanced, a new category of advisors powered by artificial intelligence emerged called “robo-advisors”. Robo advisors became common in the stock markets, as millions of retail investors took advantage of these innovations which helped to automate their trading income streams and beat the market.

What Is A Robo Advisor?

A robo advisor is a type of artificial intelligence-powered investing software. Robo advisors were designed to beat the markets by analyzing historic patterns and processing data about market dynamics. They can help a client organize their investment strategy similar to a real-life financial advisor, by providing functions such as portfolio restructuring, goal planning, automated investment, de-risking/hedging, and more.

A key strength of robo advisors is that they get more intelligent as they start investing in the market and gathering data using AI technology. The AI-based investment advisor is different from a trading bot because bots run the same patterns repeatedly, while AI advisors learn from new data streams.

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The world’s largest investment companies rely on robo advisors to manage their client’s portfolios. The low fees and performance led to the industry growing from $200 billion in 2017 up to $1 trillion in 2022.

For example, Vanguard, the second largest investment fund in the world, relies on robo advisors for a large part of their client’s investment portfolios. Their “Personal Advisor Services” oversees over $200 billion of assets under management.

Robo advisors can be obtained from a regular investment bank or a fund that has access to this type of software. A client can inquire about it at their investment bank, or it can come with a default package.

The Robo advisor industry experienced explosive growth during the past 5 years. Unfortunately, it hasn’t expanded in the crypto markets to the extent it did in stocks, as the high volatility and unpredictable market dynamics in crypto make automated trading less effective.

Who Invented Robo-Advisors?

Robo advisors are a relatively new invention; the first automated advisors appeared between 2006 to 2007. The first advanced AI-powered advisors were developed in 2008 for private institutional investors on Wall Street, while the first robo advisor available to the general public, “Betterment,” came on the market in 2010.

The largest investment banks such as Blackrock, Vanguard, Morgan Stanley, JP Morgan, etc. have been hiring top AI talents to develop their own prototypes of financial advisors during the last decade.

Interestingly, the US Securities and Exchange Commission (SEC) has granted robo advisors legal status, effectively treating them the same as human financial advisors.

Are Robo Advisors Actual Robots?

Robo advisors are not tangible robots, but digital software trained by artificial intelligence. Most of them are written in Python, a programming language used for AI development.

The AI technology in Robo advisors allows them to derive buy/sell signals from multiple sources, accounting for different algorithms and historic patterns. As they derive knowledge, they employ various algorithms to organize the data and place trades accordingly.

The data processing abilities of robo advisors allow them to adjust to dynamic market conditions. It can process thousands of bits of information in a second and place a trade using the user’s funds. The decisions a robo advisor makes are based on hard-calculated mathematical formulas applied to real-time market conditions.

The average robo advisor will use indicators such as moving averages, RSI, linear regression, Fibonacci retracement, volume profiles, pivot points, and other metrics to calculate market dynamics.

The robo advisor’s trading style will also be customized to the client’s individual goals. For example, if a client wants to make less risky trades and place safer bets on the market, the robot will invest in safe assets that grow slowly over an extended timeline. If the client intends to place riskier leveraged trades, the advisor can adjust accordingly.

How Do Robo Advisors Work?

Robo advisors are custom-tailored for every individual company. There are steps that it takes to onboard a new client:

  1. Account approval. Similar to applying for a trading account at any brokerage, the applicant has to get their account approved by passing KYC requirements (although this can be waived for certain robo advisors.)
  2. Trading set-up. The robo advisor will inquire about the client’s personal trading goals, inquiring about the amount of money they plan to make and the trading style, as well as preferred asset categories too. This helps the robo advisor customize an investment strategy for the client.
  3. Portfolio rebalancing. If the client has an active portfolio, the advisor can rebalance their portfolio by selecting the best assets for their goals.
  4. Live trading. The advisor will immediately start placing trades once the funds are deposited and the user data is submitted.

The steps vary based on the investment company and the advisor requirements. Most will require a balance of at least $1,000 to start with and this may not include charges from the total assets under management.

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Are Robo Advisors Used In Crypto?

AI-powered robo advisors are not used in crypto as often as in the stock markets. This is because the volatility of the crypto markets is significantly higher compared to stocks, making investors hesitant to use automated trading software for day trading.

In the less-volatile stock markets, investors feel more confident using automated software; hence most robo advisors were designed for the stock markets.

Cryptocurrency investing strategies are being offered by automation bots such as Pionex, CoinRule, CryptoHopper, however, none match the tailoring features of the robo advisors offered for the stock markets.

Are Robo Advisors Safe?

Robo advisors employ stop-losses and safety mechanisms that prevent liquidation for a client. Banks that employ artificial intelligence minimize the risk on their clients by testing the robo advisors with billions of dollars worth of their own money.

It can be safer than a real-life financial advisor because it’s always in tune with the market. If the asset is dropping and the robo advisor detects losses, it can sell preemptively and prevent major losses.

How Much Does A Robo Advisor Cost? 

The fee for a robo advisor will typically range between 0.25-0.5% of the total assets under management. Robo advisors may charge a monthly fee such as $100-1,000/month based on their effectiveness. In contrast, a financial advisor can charge 1-2% on assets under management including an upfront $3,000-5,000 fee for the business plan setup.

How Does A Robo Advisor Decide How To Allocate Your Investments? 

Robo advisors design a unique profile for every client based on their budget and trading goals.

At the start of each campaign, after a client submits detailed information about their goals, the robo advisor tailors its trading strategy and algorithms according to those goals.

For example, if the client wants a 100% return in six months, the advisor can re-allocate their portfolio to riskier assets and use leverage to achieve their goal. The robo can also invest in safe blue chip stocks for lower, safer gains over the long term.

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Do Robo Advisors Beat The Market? 

Robo advisors are designed to beat the market, but the average returns are in the 3-4% range on a 2-year timeline. But given that blue chip stocks and crypto can grow slightly less or more, not all robo advisors necessarily beat the market. UBS, the largest Swiss-based investment group, sold its “SmartWealth” robo because it was losing money.


What is the bottom line–are robo advisors worth it? Yes–these intelligent software provide cutting-edge AI technology to place trades effectively and maximize a client’s investment account, paralleling advancements in the AI space over the last decade. The more reputable a robo advisor is, the more expensive it will be, and before signing up for one, investment banks will screen customers for minimum net worth requirements.

The crypto robo advisor industry, on the other hand, is still in its infancy. There aren’t many crypto robo advisors of the caliber offered in the stock markets. But with the growing interest in crypto trading, it’s likely development is already underway and we may well see a robo advisor for crypto that can rival its stock market counterparts in the very near future.

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