Rabo-advisors: How can automated investment advice change risk profiling practices

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Risk profiling is integral for the construction of portfolio allocations in investment advice. Robo-advisors are a new kind of investment advisor that solely conducts risk profiling through online means. This contrasts with traditional investment advisors, whose focus does not lie solely on provision of investment advice. The aim of this paper was to see whether these robo-advisors can change risk profiling. The differences between the risk profiling process and the methodologies employed were assessed. The future potential for robo-advisors if they use technology efficiently was also assessed. It was found that robo-advisors generally use the same risk profiling process and risk tolerance measures. They also provide advice in the same way as their traditional counterparts, excluding some exceptions. Because of their high interactivity, robo-advisors have the potential to gather and incorporate more data on their clients’ lives into their risk profiling. Additionally they can further explore new portfolio allocation theories that incorporate mental accounts. Furthermore, they can extend the scope of their advice to also extend to personal or household finances. Additionally, they have the potential to offer clients new ways in which they can learn about investing. If they incorporate these things, they potentially can change risk profiling.
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