We all know about how the business model of robo-advisor works. First, determine the appropriate asset mix based on the risk, return, tax regime and other specific needs of the client. Then, build the portfolio and rebalance it on a periodic basis. The typical investment process can be summarized by the following steps:
By following these simple rules, a portfolio will get investing decisions similar to what is depicted in the chart below. The top panel shows the price chart of the Dow Jones Global Index and the bottom panel shows the relative price performance of DJ Global against US Treasuries. Depending on the exact rebalancing rules, a fixed-weight portfolio that re-balances periodically will buy stocks near the bottom of the market and sell them near the top.
While the basic business model of the robo-advisor remains unchanged, I can see a couple of competitive threats to the standalone robo model. In fact, these threats may spell a peak of the standalone robo-advisor.
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