Robo-Advisor: An Interesting Challenge

Author:Mr Michele Odello and Francesco Paolo Sasso

Technological innovation has been affecting the financial sector for several years, by progressively changing aspects of the business. This process has seen a first phase that involved the management of information, a second phase that changed the way transactions were performed and, lastly, a third phase that changed the relationship between clients and service providers. With specific reference to this last phase, it is interesting to understand whether market players traditionally active in the financial consulting sector (i.e. traditional banks) will be able, in the future, to contribute to the development of automated consulting.

Traditional banks already have a sufficiently wide range of clients and the expertise to bring their products to a regulated market; on the other hand, FinTech companies could help the banking industry improve their traditional offerings in different ways. Traditional banks may provide, for example, white-label robo-advisors to help clients navigate the investment world and, as a result, create a better and more tailored experience for their clients. Partnerships between banks and FinTech companies are also likely to increase the efficiency of such business.

In this regard, it is worth remembering that the innovative aspect referred to the so-called robo-advisor concerns the automation of the "last-mile" that is the autonomous management of client profiling and subsequent asset allocation processes.

Advantages and limits of robo-advisor services

Robo-advisors are known as software that combines digital interfaces and algorithms, and can also include machine learning, in order to provide services ranging from automated financial recommendations to portfolio management, which require limited human intervention.

From a service provider perspective, time saving is the most important advantage of robo-advisor technology. In fact, this software helps the financial market players (i.e. banks, investment firms, asset management companies, etc.) build an optimized portfolio for their clients and create and/or choose the most convenient financial instruments for them, as specified by the clients themselves in the MiFID II suitability questionnaire.

In other words, the robo-advisor technology can help clients with the creation and optimization of their portfolio providing investment solutions whose risks are more adaptable to their needs.

However, many experts point out the limitations that occur when removing the human...

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