Robo Advisors: quantitative methods inside the robots

Abstract

Robo Advisors (RAs) are perhaps the most important disruptive trend in wealth and asset management today. There is an immense amount of information about RA systems, but still little is known about the core portfolio optimization and asset allocation methods applied within such systems. Thus, to date, there is no comprehensive analysis of the methods used in RAs, their occurrences in these systems, the respective volumes of assets under management (AuM), and the future methodological prospects of the RAs. We analyzed 219 existing RAs worldwide and showed that Modern Portfolio Theory remains the main framework used in RAs. The current trend is to improve and augment this framework rather than applying and developing entirely new approaches. However, we also revealed that the AuM volumes tend to be higher for the systems applying newer and more sophisticated methods. In general, there is a clear gap between the predominant methods applied in RAs and new methodological developments. In the future, as the RA services mature, we can expect that the RAs system will adopt many of the new approaches since they promise good performance and have certain marketing potential.