Roboadvisers: a Primer

According to Business Insider, the term roboadviser was first coined by a reporter in 2002, before really entering into use in 2011 and 2012.  However, the term itself is terrible, because nobody knows what it means!

So in this piece, I’m going to define the roboadvisers, summarize how the various roboadvisers differentiate themselves, compare each roboadviser’s Assets Under Management (AUM), and finally discuss the profitability of the industry.

Definition: If you want to invest money or manage your personal finances, you can hire a portfolio manager or financial adviser to help you.  However, these services are not only costly, but often give bad advice.  To solve this problem, the roboadvisers use computers and algorithms to understand people and give better financial advice.

For instance, let’s say you wanted to invest for retirement.  A simple roboadviser might ask your age, the amount of money you have saved up, and ask how you feel about risky investments.  Based on this information, it would then invest in a portfolio, usually Exchange-Traded Funds (ETFs), that matches your investment style.

And while there are a lot of robo-advisers, they all have different business models, and solve different problems.  Here are some interesting factoids:
– Vanguard’s Personal Advisor roboadviser, which only became available to the public in March of 2015, holds $75 billion in AUM – twice as much as all other roboadvisers combined.
– The most well-funded startup, Betterment, raised $205 million in fundraising and has $5 billion in AUM.
– The roboadvisers charge very different fees, from free to 1% of AUM to a monthly fee.

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