Robo-Advising in Motion: A Model Predictive Control Approach

Tomasz R. Bielecki and Igor Cialenco

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Abstract: Robo-advisors (RAs) are automated portfolio management systems that complement traditional financial advisors by offering lower fees and smaller initial investment requirements. While most existing RAs rely on static, one-period allocation methods, we propose a dynamic, multi-period asset-allocation framework that leverages Model Predictive Control (MPC) to generate suboptimal but practically effective strategies. Our approach combines a Hidden Markov Model with Black-Litterman (BL) methodology to forecast asset returns and covariances, and incorporates practically important constraints, including turnover limits, transaction costs, and target portfolio allocations. We study two predominant optimality criteria in wealth management: dynamic mean-variance (MV) and dynamic risk-budgeting (MRB). Numerical experiments demonstrate that MPC-based strategies consistently outperform myopic approaches, with MV providing flexible and diversified portfolios, while MRB delivers smoother allocations less sensitive to key parameters. These findings highlight the trade-offs between adaptability and stability in practical robo-advising design.

Date: 2026-01
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