• About Us
  • Get Insights to Your Inbox
Friday, June 9, 2023
Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors
Insights@Questrom
  • Our Insights
    • All
    • Business Challenges
    • Business Education
    • Business Functions
    Inflation Causes Drivers to Switch Car Insurance Carriers

    Inflation Causes Drivers to Switch Car Insurance Carriers

    The Right Amount of Cards, Cash and ID to Carry in Your Wallet

    Inside the Push to Make Everyone Friends at Work

    Strategies for Onboarding in a Hybrid World

    Strategies for Onboarding in a Hybrid World

    How do sustainable supply chains improve the continuity of supply and protect the environment?

    How do sustainable supply chains improve the continuity of supply and protect the environment?

    3 Ways Boston University’s Online MBA Is A Disruptor In Business Education

    New Immigration Data Point To Larger U.S. Workforce Issues

    A Risk Management Nightmare at Silicon Valley Bank

    How CFOs are navigating the debt ceiling standoff

    Opposing scientists find no clear evidence for gender bias in academic science

    Opposing scientists find no clear evidence for gender bias in academic science

    Benefits of Supply Chain Visibility

    Benefits of Supply Chain Visibility

  • Videos & Podcast
    • All
    • Podcast
    • Videos
    Leadership Communications

    Leadership Communications

    Demotivating Effects of Relative Performance Feedback on Middle-Ranked Workers’ Performance

    Demotivating Effects of Relative Performance Feedback on Middle-Ranked Workers’ Performance

    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

    AI: What is it and how will it impact business?

    Is Creativity in Advertising Dead in the age of AI?

    Is Creativity in Advertising Dead in the age of AI?

    How Higher Ed Can Contend with Learning Platforms

    How Higher Ed Can Contend with Learning Platforms

    How Companies Deal with Disruption

    How Companies Deal with Disruption

    Money: It’s created. It’s destroyed. But what is it?

    Money: It’s created. It’s destroyed. But what is it?

    Blockchain, Beyond Crypto

    Blockchain, Beyond Crypto

    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

    S1:E2 What the FTX?

  • Insights Events
    • Events
    • Insights Live
    • Questrom Institute Events
  • In the Media
    • All
    • BU Today
    • Global Media
    • Local Media
    • National Media
    • Op-Ed
    • The Brink
    Inflation Causes Drivers to Switch Car Insurance Carriers

    Inflation Causes Drivers to Switch Car Insurance Carriers

    Should Companies Refrain From Making Political Statements?

    Should Companies Refrain From Making Political Statements?

    The Right Amount of Cards, Cash and ID to Carry in Your Wallet

    Inside the Push to Make Everyone Friends at Work

    Here’s Why Experts Say Russia and China’s Attempts to ‘De-Dollarize’ Global Markets are Going Nowhere

    5 ways Russia’s been sidestepping Western sanctions and keeping its economy alive, from switching to the Chinese yuan and dabbling in ghost trades

    Strategies for Onboarding in a Hybrid World

    Strategies for Onboarding in a Hybrid World

    3 Ways Boston University’s Online MBA Is A Disruptor In Business Education

    New Immigration Data Point To Larger U.S. Workforce Issues

    A Risk Management Nightmare at Silicon Valley Bank

    How CFOs are navigating the debt ceiling standoff

    Opposing scientists find no clear evidence for gender bias in academic science

    Opposing scientists find no clear evidence for gender bias in academic science

    Ethics Professor Raises Key Questions About the Future Use of AI

    Questrom marketing researcher explores the data-tracking debate

    Trending Tags

    • Publications
      • All
      • Books
      • Harvard Business Review
      • Journals
      • Sloan Management Review
      Should Companies Refrain From Making Political Statements?

      Should Companies Refrain From Making Political Statements?

      Make It Safe for Employees to Speak Up – Especially in Risky Times

      Make It Safe for Employees to Speak Up – Especially in Risky Times

      Will Generative AI Create a New Era of Search Competition?

      Will Generative AI Create a New Era of Search Competition?

      A Better Approach to Customer-Centric Messaging and Engagement

      A Better Approach to Customer-Centric Messaging and Engagement

      How Coworking Spaces Impact Employee Well-Being

      How Coworking Spaces Impact Employee Well-Being

      Will Salary Transparency Laws Change Employee Compensation?

      Will Salary Transparency Laws Change Employee Compensation?

      Heroes from Above But Not (Always) from Within? Gig workers’ reactions to the sudden public moralization of their work

      Heroes from Above But Not (Always) from Within? Gig workers’ reactions to the sudden public moralization of their work

      To Encourage Patients to Fill Prescriptions, Fix Copays

      To Encourage Patients to Fill Prescriptions, Fix Copays

      Is Tesla’s Era of Dominance Coming to an End? What Experts Say

      Is Tesla’s Era of Dominance Coming to an End? What Experts Say

      Trending Tags

      Insights@Questrom
      • Our Insights
        • All
        • Business Challenges
        • Business Education
        • Business Functions
        Inflation Causes Drivers to Switch Car Insurance Carriers

        Inflation Causes Drivers to Switch Car Insurance Carriers

        The Right Amount of Cards, Cash and ID to Carry in Your Wallet

        Inside the Push to Make Everyone Friends at Work

        Strategies for Onboarding in a Hybrid World

        Strategies for Onboarding in a Hybrid World

        How do sustainable supply chains improve the continuity of supply and protect the environment?

        How do sustainable supply chains improve the continuity of supply and protect the environment?

        3 Ways Boston University’s Online MBA Is A Disruptor In Business Education

        New Immigration Data Point To Larger U.S. Workforce Issues

        A Risk Management Nightmare at Silicon Valley Bank

        How CFOs are navigating the debt ceiling standoff

        Opposing scientists find no clear evidence for gender bias in academic science

        Opposing scientists find no clear evidence for gender bias in academic science

        Benefits of Supply Chain Visibility

        Benefits of Supply Chain Visibility

      • Videos & Podcast
        • All
        • Podcast
        • Videos
        Leadership Communications

        Leadership Communications

        Demotivating Effects of Relative Performance Feedback on Middle-Ranked Workers’ Performance

        Demotivating Effects of Relative Performance Feedback on Middle-Ranked Workers’ Performance

        S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

        AI: What is it and how will it impact business?

        Is Creativity in Advertising Dead in the age of AI?

        Is Creativity in Advertising Dead in the age of AI?

        How Higher Ed Can Contend with Learning Platforms

        How Higher Ed Can Contend with Learning Platforms

        How Companies Deal with Disruption

        How Companies Deal with Disruption

        Money: It’s created. It’s destroyed. But what is it?

        Money: It’s created. It’s destroyed. But what is it?

        Blockchain, Beyond Crypto

        Blockchain, Beyond Crypto

        S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

        S1:E2 What the FTX?

      • Insights Events
        • Events
        • Insights Live
        • Questrom Institute Events
      • In the Media
        • All
        • BU Today
        • Global Media
        • Local Media
        • National Media
        • Op-Ed
        • The Brink
        Inflation Causes Drivers to Switch Car Insurance Carriers

        Inflation Causes Drivers to Switch Car Insurance Carriers

        Should Companies Refrain From Making Political Statements?

        Should Companies Refrain From Making Political Statements?

        The Right Amount of Cards, Cash and ID to Carry in Your Wallet

        Inside the Push to Make Everyone Friends at Work

        Here’s Why Experts Say Russia and China’s Attempts to ‘De-Dollarize’ Global Markets are Going Nowhere

        5 ways Russia’s been sidestepping Western sanctions and keeping its economy alive, from switching to the Chinese yuan and dabbling in ghost trades

        Strategies for Onboarding in a Hybrid World

        Strategies for Onboarding in a Hybrid World

        3 Ways Boston University’s Online MBA Is A Disruptor In Business Education

        New Immigration Data Point To Larger U.S. Workforce Issues

        A Risk Management Nightmare at Silicon Valley Bank

        How CFOs are navigating the debt ceiling standoff

        Opposing scientists find no clear evidence for gender bias in academic science

        Opposing scientists find no clear evidence for gender bias in academic science

        Ethics Professor Raises Key Questions About the Future Use of AI

        Questrom marketing researcher explores the data-tracking debate

        Trending Tags

        • Publications
          • All
          • Books
          • Harvard Business Review
          • Journals
          • Sloan Management Review
          Should Companies Refrain From Making Political Statements?

          Should Companies Refrain From Making Political Statements?

          Make It Safe for Employees to Speak Up – Especially in Risky Times

          Make It Safe for Employees to Speak Up – Especially in Risky Times

          Will Generative AI Create a New Era of Search Competition?

          Will Generative AI Create a New Era of Search Competition?

          A Better Approach to Customer-Centric Messaging and Engagement

          A Better Approach to Customer-Centric Messaging and Engagement

          How Coworking Spaces Impact Employee Well-Being

          How Coworking Spaces Impact Employee Well-Being

          Will Salary Transparency Laws Change Employee Compensation?

          Will Salary Transparency Laws Change Employee Compensation?

          Heroes from Above But Not (Always) from Within? Gig workers’ reactions to the sudden public moralization of their work

          Heroes from Above But Not (Always) from Within? Gig workers’ reactions to the sudden public moralization of their work

          To Encourage Patients to Fill Prescriptions, Fix Copays

          To Encourage Patients to Fill Prescriptions, Fix Copays

          Is Tesla’s Era of Dominance Coming to an End? What Experts Say

          Is Tesla’s Era of Dominance Coming to an End? What Experts Say

          Trending Tags

          Insights@Questrom
          Home Our Insights Business Challenges Digital Business

          What Do We Know About Robo-Advising?

          Steven KoubySteven Kou
          April 7, 2021
          in Digital Business, Finance & Accounting, Technology
          18
          A A
          What Do We Know About Robo-Advising?

          Financial automation, or robo-advising, is a quickly growing industry. Trends such as WallStreetBets, the subreddit that led the GameStop surge, have sparked interest in investing for young audiences. Apps such as Robinhood are growing rapidly and utilize robo-advising as their core services. Steven Kou, Questrom Professor in Management and Professor of Finance, breaks down robo-advising so investors can understand its advantages and downplays.  

          By Steven Kou

          Robo-advising is a financial automation process that is revolutionizing household finance, not just in asset allocation, but also in consumer borrowing and lending, mortgage choices, consumption, and saving. Financial automation is inevitable; we should not exaggerate it, but we must embrace it.

          Robo-advising first appeared in 2008 and aims to provide automatic financial advice to the general public, generally at low cost. There is a wide range of robo-advising, from domain-specific (e.g. asset allocation only) to holistic (e.g. including tax and insurance planning), from fully automatic to hybrid, from high-frequency trading to long-term retirement planning. Assets under management of robo-advising almost hit one trillion dollars in 2020, with major players including Vanguard, Fidelity, and Charles-Schwab. Financial apps such as Robinhood have also targeted the robo-advising field and appeal to younger audiences.

          What are the differences between robo-advising and traditional financial advising? Although it is difficult to give a comprehensive answer, it is useful to focus on the asset allocation part of robo-advising to glimpse the differences. First, a robo-advisor must effectively elicit clients’ risk profiles based on simple inputs. A robo-advisor does not have the luxury of a traditional financial advisor, who can talk to a client personally for an extended period (e.g., one hour) and can ask many questions to engage the client.

          Second, to convince the general public to use its services, a robo-advising system needs to provide recommendations consistent with conventional investment wisdom, as clients can easily change their inputs on the internet to test the system’s effectiveness.

          Third, the advice of robo-advisors typically also contains outputs that may be helpful to educate investors in a more formal way. For example, the outputs may give guidelines on the dynamics of a portfolio strategy across time, the cross-sectional portfolio strategies for investors with different investment horizons, and the changes in the portfolio strategy for an investor, should the estimated asset returns vary.

          Compared to traditional financial advising, robo-advising can reduce costs, mitigate human biases such as those due to psychology or moral hazard, implement trading strategies that are difficult for humans to do (e.g. high-frequency trading), adapt the latest algorithms, and, perhaps most importantly, lead to more financial inclusion. For example, there are already robo-advising algorithms designed to help low-income people to manage debts, payments, consumption, and investments on a unified platform.

          The challenges ahead for robo-advising are manifold, most of which beseech us to consider interdisciplinary approaches, such as those from psychology (eliciting risk profiles, human-machine interaction), sociology (herd behavior of similar algorithms, network effects), and computer science (algorithm biases, privacy issues of individual financial data).

          Finally, caveat emptor still applies when an investor uses robo-advising. First, robo-advisors hold the same legal status as human advisors, and in the United States must register with the Securities and Exchange Commission. Second, investors should be aware of how firms use robo-advising to make money from their customers. In addition to management fees and the interest earned on cash balances, the revenue may be generated from payments for order flow (rebates from brokerage firms that execute the trades) and from marketing targeted financial products to the customers. The latter two may lead to biased investment advice via clandestine financial incentives if the fiduciary duty of robo-advising is breached.


          About Our Expert

          STEVEN KOU
          Questrom Professor of Management
          Professor of Finance

          Professor Steven Kou is an expert on FinTech and mathematical finance. His research on FinTech spans the following topics: robo-advising, econometrics with privacy preservation, the wisdom of the crowd, P2P financing, blockchains, and cryptocurrencies. In mathematical finance, he is well known for the double exponential jump diffusion model, the pricing of path-dependent options, risk measures, and credit risk modeling. Some of his research results have been implemented widely in commercial software packages and terminals.

          Tags: Steven Kou
          Share2Tweet1ShareShareSend
          Steven Kou

          Steven Kou

          Steven Kou is Questrom Professor of Management in Finance at Boston University Questrom School of Business.

          Related Posts

          A Risk Management Nightmare at Silicon Valley Bank
          Finance & Accounting

          How CFOs are navigating the debt ceiling standoff

          May 17, 2023
          Stop Comparing ChatGPT to Calculators!
          Digital Business

          Stop Comparing ChatGPT to Calculators!

          April 27, 2023
          Is Creativity in Advertising Dead in the age of AI?
          Digital Business

          Is Creativity in Advertising Dead in the age of AI?

          March 8, 2023
          Inflation Cools, Prices Remain High
          Business Policy & Markets

          Inflation Cools, Prices Remain High

          February 23, 2023
          How Will AI & Machine Learning Impact Your Business?
          Digital Business

          Do People Believe Generative AI?

          February 2, 2023
          Insights Q&A – TRUST: A Graphic Novel
          Digital Business

          Insights Q&A – TRUST: A Graphic Novel

          October 12, 2022
          Food Delivery Platforms: Worth the Bite Out of Revenue for Restaurants, or has the Relationship Spoiled?
          Business Challenges

          Food Delivery Platforms: Worth the Bite Out of Revenue for Restaurants, or has the Relationship Spoiled?

          July 19, 2022
          Building Trust to Combat the Spread of Misinformation About Corporations
          Business Challenges

          Building Trust to Combat the Spread of Misinformation About Corporations

          May 5, 2022

          Upcoming Events

          No event found!

          Get Our Insights Newsletter

          Get Insights straight to your inbox by signing up now.

            Popular Insights

            • Thinkers50@BUQuestrom: Passion & Purpose

              Thinkers50@BUQuestrom: Passion & Purpose

              21 shares
              Share 8 Tweet 5
            • Ethical Implications of ChatGPT in the Educational Setting

              94 shares
              Share 38 Tweet 24
            • Do People Believe Generative AI?

              30 shares
              Share 12 Tweet 8
            • [Marketplace] How much profit do fireworks stands make?

              14 shares
              Share 6 Tweet 4
            • Silicon Valley Bank: Blame and Ethics of the Failure

              39 shares
              Share 16 Tweet 10

            Boston University Questrom School of Business
            595 Commonwealth Avenue
            Boston, MA 02215

            Follow Us

            Newsletter

            © 2023 Trustees of Boston University

            • About Us
            • Digital Business Institute
            • Human Resource Policy Institute
            • Susilo Institute for Ethics in the Global Economy
            Generic selectors
            Exact matches only
            Search in title
            Search in content
            Post Type Selectors
            • Business Challenges
              • Business Policy & Markets
              • Digital Business
              • Diversity, Equity & Inclusion
              • Entrepreneurship & Innovation
              • Future of Work
              • Health, Biopharma, & Health-Tech
              • Risk
              • Social Impact
            • Business Functions
              • Corporate Strategy
              • Finance & Accounting
              • Innovation
              • Leadership & Management
              • Marketing
              • Operations
              • Technology
            • Publications
              • Journals
              • Harvard Business Review
              • Sloan Management Review
            • Insights Events
              • All Events
              • Insights Live
              • Questrom Institute Events
            • Videos & Podcast
              • Videos
              • Insights@Questrom Podcast
              • Podcast
            • Voices in the Media
            • Our Experts

            © 2023 Trustees of Boston University

            Welcome Back!

            Sign In with Linked In
            OR

            Login to your account below

            Forgotten Password?

            Retrieve your password

            Please enter your username or email address to reset your password.

            Log In
            Suggest Topic
            X

            Add New Playlist

            -
            00:00
            00:00

            Queue

            Update Required Flash plugin
            -
            00:00
            00:00