There’s an idea that robots are going to start taking over things. More so than they already having. There’s also an idea that they are going to replace humans. We see more and more of this when we’re talking about singularity, and that’s when it starts to get scary. But I should remind you that “robots”, or machines, have been replacing humans when it comes to certain tasks for years now. We are now seeing this more in the financial industry, and this, in my opinion, is where we should be frightened. Not necessarily because it’s replacing humans, but because I don’t know that we should or could trust a robot to give us sound advice. (The opposite argument can be made here as well)
According to Investopedia, a robo-adviser is a digital platform that provides automated, algorithm-driven financial planning services with little to no supervision. This sounds incredibly basic, which makes you wonder if it’s even legit. People don’t tend to associate the word basic with trust. Especially when it comes to investments or anything financial, as it is often extremely complex and too hard to understand.
Most investment products come with the risk of losing your money and many people may not fully understand what this entails. For example, back in 2008, a lot of homeowners struggled because they did not expect the value of their home (asset) to decrease so sharply that it would be worth less than the money that they borrowed in order to buy it (mortgage). However, at the same time, there was an increase in mortgage rates which made monthly repayments more expensive and unaffordable for many. As a result of these two factors, people couldn’t sell their house to repay the mortgage that they owe (because the asset is now worth less than the loan) which led to foreclosures and bankruptcies.
So how does a robo-advisor fit into all of this? In order to initiate robo-advice, you have to first be screened through an initial investor where the client will be asked questions to determine their risk-return profile. After that, the robo-advisor will implement these investment strategies and allocate money to the right types of investments for the client’s profile. From there, they will monitor and evaluate if the client’s investments are performing as expected and readjust as required. Robo-advice is gaining momentum because the cost of the advice is cheaper. There is also no minimum investment amount making the service accessible to almost anyone who has savings.
Robo-advisors can’t coach clients out of potentially disastrous decisions like a financial planner can and often would. On the other hand, your wealth manager can help convince you to invest in risky assets (where you can stand to make more money) if they explain their rationale in a thorough manner that you can understand. Not all coaching is helpful though. Human advisors could steer clients towards fraudulent products. While robo-advice will streamline the process of investing and make it more accessible to more people due to its low cost, it’s still no replacement for your own financial literacy.