Robo Advisory refers to semi- or fully automated financial services (investment advice and/or asset/wealth management) by considering the customer-specific risk and requirement profiles.
It offers range from simple model portfolios (one or more investment strategies, e.g. exchange-traded funds (ETFs), are transferred to the customer's portfolio in accordance with the deposits) to AI portfolio advisory platforms that include the customer's previous accounts, portfolios, contracts and value expectations in the analysis. From the client's point of view, this creates what appears to be a personal diversified investment strategy for them - even though this is often not the case. If clients deposit (or withdraw) capital or if the situation on the financial market changes, their portfolio is automatically adjusted accordingly. For this service, they pay a small (usually percentage) fee.
The biggest advantage of robo advisory is that the investment model can be cost-effective and scalable for both the clients and the financial service provider, because instead of advising each client individually and creating individual portfolios for them, all that is needed is a portfolio manager (or algorithm) that creates investment strategies that are then automatically transferred to the clients' portfolios, weighted differently if necessary.
Robo Advisory is also regulated.
Depending on the business focus, Robo Advisors in Germany are regulated according to §34f/d/h GewO or §32 KWG. The biggest difference is whether they only offer advisory services (or financial investment brokerage), or manage assets actively:
- In practice, robo advisors acting as financial investment intermediaries first ask clients some questions and then suggest an investment strategy. Afterwards, this strategy is implemented and may not be adapted/adjusted by the robo advisor on its own authority (with some exceptions, such as an annual rebalancing in the case of a "20% equities / 80% bonds" strategy). All process is supervised by the responsible Chamber of Industry and Commerce (IHK).
- Robo advisors licensed as (digital) asset managers, conversely, have a much broader scope of action. They also initially ask some questions and compile a portfolio but can adjust during the management period - for example, if they recognize patterns for a stock market crash. Unlike the first group, robo advisors like these are regulated by BaFin. So, to be accepted as "real" digital asset managers, robo advisors must have a license under Section 32 of the German Banking Act (KWG) and be regulated by the German Federal Financial Supervisory Authority (BaFin).
In other words, to be accepted as "real" digital asset managers, robo advisors must have a license in accordance with Section 32 of the German Banking Act (KWG) and be regulated by the German Federal Financial Supervisory Authority (BaFin).