- What is a Robo-Advisor and How Does it Work?
- Benefits of Robo-Advisor Platform Development for an Investment Firm
- Key Features of the Robo-Advisor Platform
- Components of a Robo-Advisor
- How to Build a Robo-Advisor Platform?
- How Much Does It Cost to Make a Robo-Advisor
- How Can DesignersX Help You Empower Your Business with a Robo-Advisor Platform?
In the dynamic landscape of financial technology, one remarkable innovation commanding attention is the Robo-Advisor platform. This cutting-edge technology not only reshapes our approach to investments but is poised to revolutionize the entire financial industry.
As per Statista projections, the robo-advisor market is anticipated to attain a valuation of $1,802 billion by 2024, with an impressive annual growth rate of 8.06%. By 2027, the market is forecasted to surge to $2,274.00 billion, underscoring the undeniable popularity of this forward-thinking investment approach.
In an era where businesses are compelled to embrace innovative solutions for staying competitive, investing in robo-advisor platform development is not merely an option but a strategic necessity. The benefits of a robo-advisor platform, from boosting operational efficiency to automating financial decision-making and optimizing wealth management strategies, are diverse.
This article aims to be an exhaustive guide, offering insights into the intricacies of developing a robo-advisor platform and its associated cost dynamics. On average, the development cost of a robo-advisor platform can vary from $35,000 to $300,000 or more, contingent on various factors.
While we will explore these factors in detail, let’s first delve into the fundamentals and understand why creating a robo-advisor application is imperative for your business.
What is a Robo-Advisor and How Does it Work?
A robo-advisor works as an automated investment platform that uses algorithms, drawing on artificial intelligence and machine learning. The main purpose of the robo-advisor is automated finance management, which makes it more advantageous for the newcomers and for the businesses with small portfolios.
Let’s have a look at the comprehensive analysis of the functioning of the robo-advisor platform for an investment firm.
- Investor Input: The user provides crucial information, like their investment objectives, level of comfort with risks, and other pertinent information.
- Algorithmic Portfolio Creation: A personalized investment portfolio is then constructed by the algorithm which is tailored to meet the specific needs of the investors, drawing insights from the provided data.
- Continuous Monitoring and Adjustments: Constant monitoring is done by the robo-advisor, which makes all the necessary adjustments to uphold the desired balance between risk and return.
This approach relieves investors of the constant burden of making the investment decisions, and streamlining the entire process.
Benefits of Robo-Advisor Platform Development for an Investment Firm
Investment firms that invest in the development of robo-advisors can experience improved operational efficiency, gain valuable data-driven insights, and enhance client interactions. These advancements enable them to establish a strong position as agile leaders in the constantly changing financial landscape. Let’s delve into the various benefits in more detail.
1. Cost-Effective Solutions
Digital advisors offer a range of significant advantages, and one of the most significant is their affordability. Talking about their annual fees, which is much lower in comparison to the personal finance managers. In general, the fee is just a fraction of what a traditional finance manager would actually charge, which is around 0.2-0.4% of the client’s balance. This cost-effectiveness makes robo-advisor a compelling choice for the individuals seeking financial guidance, without the burden of high fees.
2. No Minimum Account Balance
Financial-advice is provided by the robo-advisors without the minimum account balance requirements. The income of the human wealth managers is dependent on the client’s assets under management, because of which the human wealth managers set high minimums. Because of this it is advised to maintain a low-balance account. The robo-advisors digital platforms are scalable easily, so that they can serve profit to their clients. The greater the accessibility, the more is the uniqueness which brings value to the beginning investors with limited capital.
3. Real-Time Analytics and Advice
Valuable advantages such as real-time analytics, and advisory capabilities, are offered by the automated financial advisors, who are also known as robo-advisors. Talking about the human finance managers, who are just limited to their inability to monitor the market constantly, and the robo-advisors who are accessible 24/7. Real-time analytics help in swiftly responding to market fluctuations, timely response to the dynamic market changing trends, and the rapid adjustment to the recommendations for all the clients.
4. Emotion-Free Decision-Making
Emotions have the potential to adversely affect financial decisions, leading to less-than-ideal outcomes. Robo-advisors stand out in providing investment recommendations that are devoid of emotional influence. These suggestions are based on impartial, goal-oriented analysis, ensuring that each investor receives guidance rooted in rational examination rather than subjective biases.
5. Comprehensive Documentation
To efficiently handle investment advice, having a systematic approach is crucial. Robo-advisors simplify this process, eliminating the need for clients to manually document advice across various channels as is often the case with traditional finance managers. Through a user-friendly mobile app, all recommendations are conveniently presented in an organized and documented manner, making it easy for clients to access and track. This underscores the effectiveness of robo-advisors in facilitating straightforward monitoring of financial guidance.
Source: Grandview Research
Key Features of the Robo-Advisor Platform
Robo-advisor platforms boast distinctive features that set them apart in the realm of automated investing. These capabilities empower investment firms to efficiently navigate the intricacies of the financial landscape and address the ever-changing requirements of their clients. Below, we will delve into the detailed features involved in the development of robo-advisor platforms.
1. Automatic Rebalance
Automatic rebalancing stands as a vital feature enabling the ongoing monitoring and adjustment of an investment portfolio. This function consistently evaluates the asset allocation, aligning it with the client’s goals. Through this process, volatility is effectively reduced, and risk management is optimized. The automated nature of this mechanism ensures the portfolio maintains its intended risk-return profile consistently over time.
2. Portfolio Management
Robo-advisor platforms offer clients all-encompassing portfolio management services. Beyond the initial establishment of a diversified portfolio tailored to the client’s goals, these services extend to ongoing monitoring and automatic rebalancing. This ensures the portfolio consistently aligns with the client’s objectives. The platform’s proactive approach to portfolio management is designed to maximize returns while minimizing risk.
3. Risk Tolerance Assessment
The robo-advisor initiates an onboarding process featuring a thorough questionnaire. This assessment evaluates the client’s risk tolerance and financial objectives. This crucial step ensures that the investment plan formulated by the platform aligns with the client’s comfort level regarding potential market changes and losses.
4. Asset Allocation
Robo-advisors employ mean-variance analysis to strategically allocate assets and construct diversified portfolios. This sophisticated methodology aims to achieve the optimal balance between risk and return. It achieves this by selecting assets based on their historical performance and their correlations with each other.
5. Investment Analytics
Robo-advisors leverage investment analytics for continuous monitoring and rebalancing of portfolios. Through the processing and interpretation of extensive datasets, automation facilitates informed decision-making to adjust portfolios. This ensures the maintenance of the desired asset allocation, aligning with client financial goals.
6. Tax- Loss Harvesting
Robo-advisors employ tax-loss harvesting as a strategic tax strategy to enhance after-tax returns for investors. This method entails the strategic sale of underperforming investments to realize losses, which, in turn, offset capital gains. By doing so, this approach effectively reduces the overall tax burden on an investment portfolio.
Diversification stands as a fundamental principle in the realm of investing, and robo-advisor platforms stand out for their ability to offer access to a diverse range of asset classes. This exceptional feature guarantees that investors can spread their investments across various sectors, industries, and geographic regions. In doing so, it effectively minimizes the impact of underperformance in any specific area.
8. Investor Education
Robo-advisors prioritize investor education by providing an extensive array of resources and tools to help set goals. These valuable tools empower investors with the essential knowledge needed to make informed decisions regarding their financial future. This approach enhances financial literacy and encourages investors to take a more proactive role in the investment process.
Robo-advisors deliver unique value through continuous monitoring and automated rebalancing of investment portfolios. Employing sophisticated algorithms, these platforms closely track market conditions, asset performance, and overall portfolio composition. The automatic adjustment capability ensures adherence to the planned asset allocation.
In real-time, the robo-advisor makes decisions to buy or sell assets, maintaining the desired balance. This disciplined and objective rebalancing approach effectively manages risk by aligning the portfolio with the investor’s risk tolerance. Investors enjoy a hands-off yet responsive strategy that promptly reacts to market shifts. This provides tailored risk management in line with their financial goals.
10. Tax Optimization
Robo-advisors excel in implementing sophisticated tax optimization strategies, with a notable emphasis on tax-loss harvesting. In this strategy, the platforms strategically identify opportunities to sell investments at a loss, effectively offsetting capital gains and reducing investor tax liability. Furthermore, these platforms meticulously consider the tax implications of each trade, minimizing capital gains and preserving more returns for investors.
A key feature is the tax-efficient asset allocation, where assets with higher tax implications are strategically placed in tax-advantaged accounts. Additionally, robo-advisors offer automated tax-advantaged investing, ensuring optimal tax outcomes without requiring constant manual oversight. This comprehensive tax optimization approach underscores robo-advisors’ commitment to maximizing returns while maintaining portfolio tax efficiency.
Components of a Robo-Advisor
Constructing an effective robo-advisor involves the integration of several key components to form a cohesive financial platform that caters to each client’s needs. The foundational elements encompass:
1. Customer-Facing Frontend
A robo-advisory platform presents a user-friendly interface, typically through a web dashboard or mobile/web apps. Here, clients undergo onboarding processes such as Know Your Customer (KYC) and profiling. The accessible design serves as a valuable interaction point for users to conveniently monitor and manage their investments.
2. Money Management Algorithms
At the core of the robo-advisor lies a machine learning platform equipped with AI algorithms. These algorithms drive personalized portfolio options, offering a myriad of choices tailored to various user needs and preferences. They meticulously analyze customer information, including goals, risk tolerance, and investing ability, to construct and manage optimal portfolios. Additional algorithms may enhance functionalities like tax loss harvesting or student loan management, adding further value to the robo-advisor’s offerings.
3. Financial APIs
Financial Application Programming Interfaces (APIs) play a crucial role in the seamless operation of robo-advising platforms. These APIs connect to bank accounts, automating long-term investments and providing guidance on optimal money management approaches. Specifically, financial APIs handle critical operations such as trade execution, portfolio balancing, and integration with supplementary financial systems, forming the backbone of robo-advisor functionalities.
4. Backend System Management
A robust back-end foundation is essential for the efficient and accurate functioning of a robo-advisory system. This workspace allows financial advisors to refine and validate portfolio balancing strategies. It facilitates the development and oversight of investing algorithms, ensuring continuous enhancements. By tracking overall financial performance, the back-end verifies that the robo-advisor meets rigorous reliability and efficacy standards.
5. Portal for Partners
For employers offering competitive 401(K) plans through a robo-advisory platform, a dedicated portal for partners is crucial. This dashboard enables employers to track payroll, balances, earnings, and other relevant metrics. It provides a comprehensive view of the performance and engagement of their employees within the robo-advisory framework, facilitating effective management of retirement plans and financial well-being initiatives.
How to Build a Robo-Advisor Platform?
For the seamless efficiency and effectiveness of a robo-advisor, the creation process demands meticulous strategic planning. Collaborating with a dedicated fintech app development firm is highly recommended, leveraging their specialized expertise to ensure the optimal development and implementation of the robo-advisor platform.
Outlined below are the key steps involved in the development of a robo-advisor platform.
1. Discovery Phase
In this initial phase, the focus is on establishing ROI goals and making well-informed technology approximations. To facilitate a smooth transition, it is recommended to conduct a pre-flight workshop. This workshop serves as a platform to identify priority features, align business goals, and establish the technical architecture required for the optimal solution.
2. Proof of Concept
A proof of concept is developed to assess the efficiency of machine learning algorithms within the context of a robo-advisor. This involves creating ML algorithms that analyze customer data and generate portfolios tailored to individual client preferences. Multiple portfolio models are formulated and evaluated using historical stock market data.
The design phase involves creating the front ends of consumer-facing mobile and web applications. This includes working on user flows, generating low-fidelity UI wireframes, and later advancing to high-fidelity UI screens. It is crucial to develop an interactive prototype, test it with users, and make adjustments to the UX/UI based on their feedback. Moreover, involving developers in the design process ensures practicality and feasibility.
Once the proof of concept and design have been validated, the next step is to move into the development phase. In this stage, code is written, and both automated and manual tests are performed to identify and resolve any glitches or issues. Following an agile development approach is advisable, releasing updates every two weeks to enhance the product-market fit.
To ensure smooth coordination among the development team, including front-end developers, mobile engineers, back-end coders, testers, and UX/UI engineers, it is essential to have a dedicated product manager and project manager.
5. Deployment and Maintenance
The deployment of the robo-advisor to the public involves transitioning the platform to the production environment. Additionally, if applicable, mobile apps will be uploaded to the App Store and Google Play. Ongoing maintenance includes monitoring system performance, addressing issues, and evaluating user engagement patterns. This process informs the next development cycle, ensuring that updates introduce new features and also address any unnoticed user concerns.
Source: Grandview Research
How Much Does It Cost to Make a Robo-Advisor
When considering the development of an MVP for a robo-advisor, the anticipated cost can range from $35,000 to $300,000 or more. Several factors play a crucial role in determining the cost of developing the FinTech platform. Let’s delve into these factors in detail:
Factors Influencing the Cost of Developing a Robo Advisor Platform:
1. Use of White-Label Components or Custom Development
The decision between leveraging white-label components or opting for custom development significantly impacts costs. White-label solutions offer potential cost savings by utilizing existing technology. On the other hand, building a platform from scratch incurs higher development expenses. While a custom-built platform may be more costly upfront, it provides greater flexibility and customization options in the long term. Consider both short-term and long-term needs when deciding on an approach.
2. Integration with Existing Banking Infrastructure
The integration of a banking infrastructure is a major cost influencer. Expenses may arise due to the need for seamless integration with existing financial systems, APIs, and data sources. The complexity and compatibility of the current infrastructure contribute to the overall costs.
3. Number and Type of Front Ends (Mobile/Web)
The development cost of robo investment platforms is influenced by the number and types of front ends created. The creation of both mobile and web interfaces, along with the level of sophistication in their design, contributes to the overall development costs.
4. Addition of Specific Features
The complexity and cost of the development process can increase with the inclusion of specific features. For example, incorporating advanced functionalities such as voice capabilities into the robo-advisor may result in additional development expenses.
Careful consideration of these factors is essential for accurately estimating and planning the budget for robo-advisor app development.
How Can DesignersX Help You Empower Your Business with a Robo-Advisor Platform?
Tailoring a robo-advisor platform to specific needs has the potential to revolutionize the financial industry, providing benefits to banks, startups, and financial institutions alike. This customized approach can positively impact budgets, expedite returns, and elevate data analysis and client investment management efficiency. The goal of this bespoke solution is to automate routine operations and streamline processes, resulting in a more effective and seamless financial experience.
To unlock the full benefits of robo-advisor application development, consider placing your trust in the skilled team at DesignersX. Our FinTech software development services not only align with your unique needs and objectives but also ensure a seamless integration of cutting-edge technologies for a robust and future-ready solution.
Explore the successes we have achieved together with our clients in shaping the future of finance through AI and automation. For instance, we developed Mudra, an AI-powered budgeting app that aids millennials in better managing their money. Additionally, our collaboration with Bajaj Finserv resulted in the creation of a next-generation financial marketplace, improving access for users. Our robo-advisor app developers stand ready to assist visionary clients like yourself in leveraging automation and AI to transform financial services, enhancing both customer experiences and business outcomes. Connect with us to embark on this transformative journey!