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Will Robo Advisors Replace Traditional Investment Funds?

Photo by Jason Briscoe on Unsplash

As robo advisor models and automation technologies become ever more sophisticated, the future of investing looks set to be dominated by machine-led funds and algorithmic-only trading. 

If you’re looking to capitalize on the growing dominance of robo advisors and trading algorithms, it’s hard to look past the technological benefits of automated investing platforms like CI Direct Investing. Affordably priced and intuitively designed, these platforms support everything from traditional banking accounts to structured investment products and advanced robo advisor models. 

What Are Automated Investing Platforms?

Automated investing platforms are broadly similar to conventional investing platforms, the differentiating factor being the integration of algorithmic trading functionality and automated robo advisory services. 

If you haven’t come across the term before, a robo advisory service is simply a type of digital platform that uses algorithms to execute and run various investing functions. Some of the most commonly supported robo advisor functions include: 

  • Personalized portfolio allocations
  • Automated portfolio management and rebalancing
  • Financial literacy modules
  • Hedge fund mimicking 
  • Retirement and target date planning
  • Tax-loss harvesting

As robo advisors have become more sophisticated, the amount of capital flowing into automated investing platforms has skyrocketed. In 2015, assets under management in the robo advisory industry hit $60 billion. Today, the same industry boasts more than $2 trillion in assets under management. What’s more, according to some forecasts, client assets are now projected to exceed $7 trillion by 2025. 

While a far cry from the $17.7 trillion currently invested in the domestic mutual fund industry, the staggering speed at which robo advisors are accruing managing assets is a striking indicator for the future trajectory of the automated investing industry. 

Automated Investment Platforms vs. Traditional Investment Funds? 

To give you a better idea of how automated investing platforms stack up against traditional investment accounts, we’ve broken down three key areas where robo advisors are consistently outperforming more conventional investment instruments. 

1. Affordability 

A retail investment fund typically employs a team of highly paid analysts, account managers, and stockbrokers. In comparison, the vast majority of robo advisor platforms can function with little to no human supervision.

By substituting human labor with automated algorithms, robo advisory services are able to deliver a significant reduction in account and management fees relative to the average retail investment fund. To put this price difference in perspective, consider how the cost of a basic robo advisory service (usually a flat fee in the range of 0.2% and 0.5%) compares against the 1% to 2% fee normally charged by retail investment funds. 

2. Diversity of Features

With their huge range of customizable portfolio functions and versatile account options, automated investment platforms clearly outperform traditional investment funds when it comes to feature diversity. In addition to a suite of investment advisory functions, most automated investing platforms also offer an expansive selection of registered and non-registered trading accounts. In the unlikely event that a traditional investment fund offers similar account, retirement, or tax features, there’s a good chance you’ll be charged a hefty premium for long-term access.  

3. Portfolio Performance 

Unless a customer requests a sector-specific allocation strategy, most robo advisors use customer inputted data to build a passive, index-based portfolio. When paired with low-cost fees and integrated tax-loss harvesting, an automated index strategy will generally yield equivalent, if not better, results than the majority of managed funds. In fact, according to an in-depth analysis from Index Fund Advisors, close to 90% of all actively managed funds have underperformed against their benchmark index over the last 15 years. In 2019, the S&P 500 alone outperformed 80% of the large-cap managed fund industry.     

Will Automated Investing Platforms Supersede Traditional Investing Platforms? 

In modern markets, complex, machine-led trading algorithms are gradually becoming the primary driver for both intra-day and inter-day price movements. In the United States, this forecast has already come to pass, with algorithmic trading now accounting for approximately 80 percent of daily trading volume. In India, a notable emerging market, algorithmic trading is tracking a similar trajectory, with machine-led trades currently generating close to 40 percent of overall trading volume.

But what do these statistics mean for ordinary investors? Well, for starters, it means less capital is flowing into conventional asset allocations and old-school portfolio managers. If this macro-level trend persists, it will likely translate to a reduction in assets under management and inferior performance margins for traditional investing strategies, at least relative to the performance of modern, machine-led investing platforms. 

Key Takeaways

While human attitudes and psychology will always have a role in influencing major investing trends, the day-to-day movement of major assets is increasingly determined by the actions of automated robo advisory services and sophisticated machine-led trading algorithms. With machine-led platforms set to overtake traditional funds, investing through a robo advisory service is fast becoming one of the most efficient ways to build an affordable yet competitive investment portfolio.