Investing Automated: The Power of AI in Robo-Advising

February 4, 20247 min read
Investing Automated: The Power of AI in Robo-Advising
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Key Takeaways 

  • Robo-advisors are virtual financial advice platforms that use AI and machine learning algorithms to automate and make the most of investment processes.
  • Not only are AI-powered robo-advisors democratizing investing, but they are enhancing decision making and predictive analytics.
  • Banks and other financial institutions are increasingly adding robo-advisor technology to their services, combining human expertise with the efficiency of AI. 

Robo-advising is very much gaining in use as an automated financial solution that costs less than traditional brokers. Such services use technology to manage investments, using a strategy built around clients’ objectives and preferences.

Now on the rise is the integration of artificial intelligence, or AI, and machine learning in modern investing. This likely means even more personalized wealth management solutions, greater accessibility, and potentially better investment outcomes.

In fact, AI and machine learning are on the cusp of revolutionizing robo-advising and personalized wealth management. Here is what investors should know.

How Wealth Management Evolved

In the ever-changing sphere of finance, technological innovation is upending conventional practices at a brisk clip. And that includes investing. The rise of AI-powered robo-advisers is promising to transform wealth management.

It wasn’t that long ago that the advent of robo-advisors offered investors a new, less-costly way to build and maintain an investment portfolio. Now comes heightened artificial intelligence and machine learning to push the technological envelope even further. In fact, they are driving the next generation of robo-advisors.

Before robo-advisors, though, the only investors with the wherewithal for customized advice from human financial advisors were high-net-worth individuals. For retail investors, that meant often exorbitant fees and few investment options. Robo-advising does have limitations, but one thing it has done is make wealth management more accessible. 

AI-Powered Robo-Advisors

Robo-advisors are virtual financial advice platforms that use AI and machine learning algorithms to automate and make the most of investment processes.

The platform collects from investors essential information including financial goals, risk tolerance, and time horizon. The data is then used to produce investment portfolios based on individual preferences. 

Subsequently, AI algorithms stay abreast of market conditions and adjust holdings to ensure continued alignment with the underlying investor’s goals, although market trend analysis is limited. Most robo-advisors provide an automatic rebalancing feature.

Key Advantages of AI-Driven Robo-Advisors

As compared with the previous generation of robo-advisors, these AI-powered financial services offer distinct benefits, including: 

  • Accessibility and affordability. Compared to traditional advisors, robo-advisors offer cost-effectiveness and ease of access. Traditional wealth management services commonly charge relatively large fees.
  • Objectivity and algorithmic discipline. A key benefit of AI in investing is that it extracts emotional bias from investment outcomes, potentially resulting in improved outcomes.
  • Customization and scalability. Based on individual investors’ goals and risk profiles, AI helps construct personalized portfolios.
  • 24/7 portfolio management and automation. It is difficult for many investors to ignore the convenience of round-the-clock automated rebalancing and constant, real-time portfolio monitoring.

Impact on Wealth Management 

Robo-advisors are not only democratizing investing, but they can enhance decision making and predictive analytics. In essence, these digital platforms provide a viable alternative that melds technology with financial expertise and data analysis. 

AI robo-advisors are reshaping investor expectations as well as the entire wealth management industry through:

  • Changes in advisor roles. With robo-advising, human advisors now play a complementary role. They offer specialized guidance on estate planning, for example, as well as on more complicated financial situations. They also provide emotional support during high market volatility.
  • The driving of innovation. Banks and other financial institutions are adding robo-advisor technology to their services, combining human expertise with the efficiency of AI. 
  • Education promotion. Due to how they function, robo-advisors foster financial literacy. Through engagement with the platforms, investors gain insights into a company’s investment approaches, portfolio diversification, and risk management.
  • Better efficiency. Automation takes care of most routine tasks, freeing financial advisors to spend more time on establishing relationships, getting a handle on investor goals, and providing other services.

Robo-Advisory Platforms by Financial Institutions

There are a number of examples of prominent financial institutions that have adopted AI-driven robo-advisory platforms. Those include Vanguard’s Personal Advisor Services, Fidelity Go, and Charles Schwab’s Intelligent Portfolios. While these platforms offer automated portfolio management, they also have financial advisors available when needed.

Some banks are collaborating with tech companies or startups to enhance their offerings. For example, USBank this year announced a partnership with fintech Pagaya Technologies in which it will use the company’s artificial intelligence capabilities in processing personal loan applications.  

Future Trends and Developments in AI Robo-Advising

The world of AI-powered robo-advising is still evolving, and it is difficult to project where it will end up.

In 2023, for example, Global Predictions’ investment management tool Portfolio Pilot was approved by the Securities and Exchange Commission as a registered financial advisor. This rendered it as the first, and likely not the last, non-human entity to be so regulated by the federal agency.

Will AI robo-advisors fully replace the current generation of robo-advisors? Despite increased use, that is still a ways away. Wealthy investors, for now, still prefer human help. Note that Swiss bank UBS sold its robo-advisor SmartWealth in 2018 because it was losing money.

Still, the AI-powered, crowd-sourced hedge fund Numerai, for example, seeks to develop AI that can handle money sans human intervention, according to a 2023 Enterprise Engineering Solutions report. Further, many entities are aiming to develop AI advisors that can “think” for themselves.

Then there is PortfolioPilot, which employs a mix of AI and Global Predictions’ Economic Insight Engine to supply retail investors with current data.

Such developments in AI and machine learning could further transform robo-advising and personal finance management.

Challenges and Considerations

Currently, the sky seems to be the limit, in terms of the growth of AI robo-advisors. However, there are potential challenges including regulatory compliance, privacy concerns, and the need for human oversight.

The industry is taking some action in response to these challenges. Some robo-advisors, for example, are hosting video tutorials and webinars to educate users about their platform. There are also calls for such advisors to invest in data governance, infrastructure, and analytics. That is in addition to the adoption of best practice and standards for data quality and security, and implementation of ethical principles and guidelines.

Note that while robo-advisors essentially encompass the stock market space, there are ways to invest that have no direct correlation to volatile public markets. 

These are through alternative investments — opportunities in asset classes other than stocks, bonds, or cash.

Such investments are more and more popular as investors seek refuge from constant fluctuations and add asset classes such as art and real estate to their portfolio. After all, private markets have performed better than the stock market in every downturn of nearly the last two decades.

One way to participate is through Yieldstreet, a leading alternative investment platform on which some $4 billion has been invested to date. 

A primary Yieldstreet feature is the extent to which it vets investment opportunities. While no investment is without risk, offerings are first subject to a rigorous screening process.

Adding alternatives to one’s holdings can potentially generate consistent secondary income. It also serves another crucial purpose: diversification. Building a more modern portfolio consisting not just of stocks and bonds, but of alternative asset classes can mitigate risk. It can also shield against inflation and even improve returns.

Invest in Alternative Assets

Diversify your portfolio with private market investment offerings.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Modern investing is making room for AI and machine learning as they begin to transform the robo-advising space. The shift toward digital platforms is already affecting investing aspects such as portfolio construction and risk assessment, automated rebalancing, and market-trend analysis.

Overarchingly, artificial intelligence has the potential to majorly disrupt the financial advisory sector. 

There are limitations and considerations in AI-driven robo-advising, however. Remember, too, that there are less-volatile “alternatives” to the stock market that have the added benefits of portfolio diversification.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

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