Robots have invaded the world of financial advising. Today hundreds of online programs are available, promising sage retirement and financial investment advice at the click of a button.
That brings us to our first question: What Is a Robo-Advisor?
A robo-advisor is, in simplest terms, a robot – an automated process—that gives financial investment advice. As a substitute for traditional human-driven wealth management service providers, robo-advisors use algorithms to automate investment decisions personalized to consumers who input their investment goals and other personal information via computer or smartphone.
What Can a Robo Do?
Robo-advisors are marketed as a cost-saving alternative to traditional financial advisers. Like other online financial services, they offer consumers the ability to make financial decisions at the click of a button. Consumers log on to a computer or smartphone, answer a survey, wait moments for the robo to crunch and calculate, then receive an investment portfolio complete with a suggestions for services tailored to the consumer’s personal financial goals.
Since robos remove the overhead costs of human interaction from the financial advising equation, they could offer a much more affordable option. Fee-only certified financial planners charge by the hour or a flat fee and operate under a fiduciary duty to put the consumer’s best interest first. Traditional investment advisors typically charge fees based on one to two percent of the consumer’s invested assets and may or may not operate under a fiduciary duty. Robos typically charge fees around a half percent of the consumer’s assets. (It is important to note that the exact fees vary from robo to robo.)
Robo-advisors often claim that they produce more secure portfolios, free of advisory fraud and/or conflicts of interests. With robos, there is no searching for a trusted advisor for months, only to find out later that the advisor spent your life savings on a cruise to the Bahamas, for example. Robo-advisors are not self-interested; they focus only on the information that the consumer (and the programmer) inputs, then calculates a path to best achieve your investment goals … or so robo-marketers tell us. (More on this to come in later blogs.)
The company Betterment created the first publicly available robo in 2008. It has been followed by hundreds of similar products, stemming both from existing financial institutions—such as Charles Schwab—and from new financial technology, “fintech” startups.
Previously, robo-advisors operated in tandem with traditional advising services. The programs started simple: doing basic, mundane tasks such as managing passive buy-and-hold investments and rebalancing assets within target-date funds. Today, however, consumers can hop online and find hundreds of robos at their fingertips 24/7—and the robos’ capabilities have grown immensely.
Who Can Use A Robo?
Unlike traditional advisors who will work only with consumers who have upwards of a half-million in assets, robos-advisors do business with consumers who have as little as one thousand dollars. Thus, robo-advisors open the possibility of a personalized financial portfolio to a whole segment of lower-income and lower-wealth consumers who traditionally could not afford an investment advisor.
Like most digital technologies, robo-advisors attract new generations of young people to become involved in financial investments and planning for retirement. If robos are successful in encouraging more young people to save for retirement, the impact could be significant not only for those individual investors, but also for state and local governments, local economies, and national economic health.
Still, for consumers who are older, less educated, or have lower income or wealth, I wonder if robo-advisors will resonate.
In the future, I’ll look at how robo-advisors are regulated, consider whether they should be considered fiduciaries, and speculate as to whether robos would be a good option for financially vulnerable populations.
If readers have suggestions for other robo-related topics, please email me at email@example.com