1 The Rise of Robo Advisors

This chapter covers

The increasing popularity of robo advisors
Key features and a comparison of popular robo advisors
Python in the context of robo advising

1.1 What are Robo Advisors?

Robo advisors have become a popular alternative to human financial advisors. Historically, financial advisors would meet with clients, discuss their goals, create a financial plan, and then manage their clients’ money over time. In exchange for this personal attention, they would charge clients fees, often in excess of 1% per year of their assets under management. Numerous companies have been trying to disrupt this business through online platforms that provide automated, algorithmic investment services similar to those of a financial advisor. Some of these automated systems “advise” clients through algorithmic implementations of modern portfolio theory, based on the Nobel Prize-winning work of Harry Markowitz in the 1950s, while others use optimization techniques borrowed from other disciplines. These companies have collectively become known as “robo advisors.”

In this book, we show how anyone with a basic understanding of Python can build their own robo advisor. We hope this will be useful for anyone who wants to work in this area or wants to apply these algorithms for their own portfolio or advise others.

1.1.1 Key Features of Robo Advisors

1.1.2 Comparison of Robo Advisors

1.1.3 Things Robo Advisors Don’t Do

1.2 Advantages of Using a Robo Advisor

1.2.1 Low Fees

1.2.2 Tax Savings

1.2.3 Avoid Behavioral Biases

1.2.4 Saving Time

1.3 Example Application: Social Security Benefits

1.4 Python and Robo Advising

1.5 Who Might be Interested in Learning About Robo Advising?

1.6 Summary