Will You Entrust Your Investments To Robo-Advisors?
From robot waiters taking and serving orders to robot teachers educating learners, here come robo-advisors helping people with their investment decisions.
Combining the wonders of artificial intelligence with the marvels of financial technology can lead to pioneering creations aimed at solving a problem or making something better. The existence of robo-advisors is another outcome of AI and fintech working together.
You might picture them either as semi-humanoid or humanoid robots but they’re neither. Rather, robo-advisors are digital investment platforms, according to Investopedia, that use algorithms to deliver “financial planning services with little to no human supervision.”
While human financial advisors still remain as the primary go-to people when it comes to making one’s money grow, robo-advisors manage to make themselves a reliable option.
At Hacker News, users talked about robo-advisors after Reuters reported about the forthcoming purchase of the American firm Wealthfront by the Swiss bank UBS for $1.4 billion.
In his conversation with someone with over 20 years of experience in wealth management (could be a wealth manager/financial advisor), Matthew Bentley (user “matteotom”) categorized clients into three.
First, according to Bentley, who’s a site reliability engineer at Yelp, are the clients “who don't want to think” when it comes to their portfolio. They pay a wealth manager/financial advisor to do all the thinking for them.
Second are the clients “who want to be wined and dined.” They take a wealth manager/advisor to dinner, where they can discuss investment topics.
Third and last are the clients “who think they're smarter than everyone and want to direct everything.” Yet, despite having a very high opinion of themselves, they still seek assistance from a wealth manager/financial advisor.
Bentley should include another category: those clients who rely on robo-advisors. Those clients he identified as lazy thinkers, who would rather pay someone else to think on their behalf, may find these digital platforms appealing.
Wealthfront is a California-based robo-advisor.
Other robo-advisors mentioned in the thread were Betterment, Fidelity Go, Merrill Guided Investing (it’s referred to in the thread as Merrill Lynch), Schwab Intelligent Portfolios, and Vanguard Digital Advisor.
Cybersecurity expert Michael Borohovski (user “Borski”) is one fan of robo-advisors. As an angel investor, Borohovski likes Merrill. According to him, a simple text message will be enough to start the ball rolling. Plus, with robo-advisors around, it’s like consulting other professionals, too, such as lawyers and tax accountants.
As for the part where clients “want to be wined and dined,” per Bentley, other users agreed on the human interaction aspect of investing. Borohovski regarded robo-advisors as “’financial therapists’” of sorts.
Other users, though, commented that human financial advisors likewise function as a therapist by providing comfort, helping manage one’s emotions, initiating real-life interactions and establishing a professional relationship. Common human characteristics that robo-advisors are able to deliver, albeit in a non-personal manner. One of those who agreed just wished that his/her human financial advisor would prompt more “aggressive-fund-strategy type” of conversations.
Still, one user wanted the “analog” Wall Street to fully shift into “digital.” Another user disagreed, reasoning that it could be financially unfavorable as it could increase fees to make up for the cost of making things digital.
All in all, some users were able to name some of the benefits about robo-advisors, which include tax-loss harvesting. In the case of Betterment, it offers “automatic rebalancing” (e.g., other robo-advisors can rebalance an ETF portfolio) and “tax coordinated investing.”
Robio-advisors can also do “automatic investing,” “direct indexing,” and “retirement and taxable accounts” coordination. These three are some of the features of Wealthfront, plus an indexing algorithm called smart beta.
Their human counterparts can also accomplish those above-mentioned undertakings (with the aid of computers and software, too). However, with robo-advisors, they are more consistently and at a lower expense on the part of the clients.
Generally speaking, investments come with their respective levels of risks, particularly when one considers market volatility.
For personal finance website The Balance, robo-advisors are capable of managing these risks and taking the right steps when the market becomes volatile. However, it warns that it’s not enough to rely on their services and capabilities because people who do so may still lose money in the long run.
What The Balance advises for those using a robo-advisor is to diversify their portfolio. In addition, they can invest in real estate and keep enough cash with them.
There were Hacker News users whose views on robo-advisors reflected the ones stated by The Balance in its website.
One of them was a former Wealthfront client, who lost money when it “auto-opted” him/her on a hedge fund, which resulted in him/her paying higher fees. Everything became “a mess” when he/she opted to transfer his/her assets somewhere else because he/she found him/herself with “500 individual stock equity positions.” He/she was able to fix everything, but in the end. he/she “lost a fair amount of money.”
Another user said that robo-advisors were just “a waste of money,” particularly for an “informed investor.” Such a person (the example given was an insurance salesman), according to this user, could even be better informed than an actual human financial advisor.
So, for the informed ones, no need for robo-advisors, but the uninformed investors will benefit from both human and digital financial advisors.
Deloitte, a global financial services provider, stated in a 2016 report a forecast that by 2025, robo-advisors will handle assets under management worth an estimated $16 trillion.
Considering the pros and cons, one user, however, promotes the idea of relying on BOTH human financial advisors and robo-advisors.
Brad Jenser (user “sixminuteabs”) happens to be the co-founder and chief technology officer of Farther, a New York-based financial services company. Jenser claims that a team of experts “boosted by tech” can successfully handle wealth management.
Borrowing the words of Howie Mandel, is it a deal or no deal? Will you entrust your investments – your precious money – to robo-advisors, to human financial advisors, or to both?