4 May · 2 min read
Can robots make money? Until recently it has sounded like a science fiction question, but not anymore! The largest robo-advisor consultancy already exists in USA and it has gained immense popularity. Now the time has come also for Europe - where these smart robots have begun to arise.
Robo-advisors are a form of digital consulting platforms 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.
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 (basing on suggestions or proposing new premium features).
Robo-advisor as mentioned above is able to 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.
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.
Some robo-advisors offer loans in addition to money management. Just like traditional firms, robo advisors charge an annual management fee that is 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.
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 in order to generate the same revenues as a pricier advisor.
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