The rise of robo-advisors in the wealth management industry

Abstract

Background information: Robo-advisors are digital platforms offering automated, algorithm-driven financial planning services with low fees within minutes while allowing an investor to set up a customized, diverse portfolio. Robo-advisors are growing at a fast pace globally especially in the United States but in the case of Malta, it is still trailing behind even when compared to other European countries. Robo-advisors also give investors access to wealth management services previously reserved for the ultra-wealthy investors like tax-loss harvesting, portfolio rebalancing and dividend reinvesting. This personalised investment advice is formulated according to an investor’s risk appetite, age, financial goals and other relevant factors with minimal human intervention.

Literature: This dissertation seeks to compare the services offered by robo-advisors and traditional investment advisors along with their respective costs that will be incurred to offer the advice. This dissertation does not only analyse how robo-advisors function, but it also goes in detail on additional factors such as asset allocation, tax-loss harvesting, portfolio rebalancing, dividend reinvesting along with finance theories that these robo-advisors make use of, namely the Modern Portfolio theory.

Research question: This dissertation seeks to examine if robo-advisors should be introduced in Malta based on several factors such as the regulation needed to safeguard investors, the viability and profitability of robo-advisors should they decide to operate in Malta, what’s happening at the international level, investor education and other relevant factors.

Research methodology: In order to ascertain the feasibility of robo-advisors in the Maltese economy, knowledgeable people working in the financial sector both in Malta and abroad were interviewed through face-to-face interviews and electronic interviews. A survey whose participants are Maltese investors and also those people who do not invest was conducted in order to obtain an additional source of information from the potential users of robo-advisors.

Findings: These findings were closely related to asset allocation, conflict of interest, proprietary algorithms, regulation, restrictions to investments, investor education, observed benefits and limitations associated with robo-advisors and disruptions caused by robo-advisors in the wealth management industry.

Conclusion: The findings mentioned above were of crucial importance when tackling the research question. Although the response to this research question may be subjective according to the data collected and the person who is responding to this question, my response is that robo-advisors can and should be introduced in Malta. This decision that robo-advisors should be introduced in Malta is backed up by the data collected that is present in Chapter 4 and furtherly discussed in Chapter 5.