How can robo-advisors make money?

4 May · 2 min read

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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.

Get Definition

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.

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 (basing on suggestions or proposing new premium features).

Selling Products

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.

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. 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.

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 in order to generate the same revenues as a pricier advisor.

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