Limitations and Constraints
• Transaction costs: Additional cost will be occurred if robo-advisors are used. For example, commissions, bid-ask spreads, and market impact could reduce net financial returns by 0.3–1 % annually if rebalancing is too frequent. To avoid extra costs, robo-advisors take on threshold-based rebalancing (e.g., only when any asset drifts >5–10 % from target) instead of calendar-based monthly adjustments.
• Rebalancing frequency: Frequent rebalancing also affect fundamental expenses. It turns the portfolio close to the target risk but cause higher costs and tax events. Adopting infrequent rebalancing could alters the intended risk exposure. Therefore, Hybrid is the optimal policy. It combines time-based and tolerance bands to maintain balance while maximizing revenue.
• Asset availability: Platforms are usually restricted to liquid, exchange-traded instruments such as ETFs and mutual funds. On top of that, limitations like illiquid assets (e.g., real estate, private equity) and regulatory restrictions (e.g., accredited-investor rules) even constrain the investment. So, the revenue opportunity is further smaller.
