Where innovation catches hold, automation usually follows. Today, that means technological advancement. Headlines everywhere are talking about integrating new tech into the business world, whether it’s the latest breakthrough in processing power or an artificial intelligence assistant helping with day-to-day items.
For financial advisors, this new tech comes in the form of the robo-advisor. It’s a new way to potentially automate market investments, but is it a tool you should invest in, or a haphazard app you should pull the plug on?
Read on to learn for yourself!
What is a Robo-Advisor?
A robo-advisor is a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision. The majority build passive, indexed portfolios for their clients at a lower cost and starting balance than typical analog efforts of financial advisors working without AI assistance. Once built, the robo-advisor monitors its selected investments and invests or divests according to pre-set limits. If that holding declines in value beyond a preset range, it can reallocate investments within the portfolio to keep balanced with the other holdings. For example: a particular holding can be set to comprise 30% of a portfolio’s value, with an allowed range of plus-or-minus 5%. If that holding’s value drops below 25% or jumps above 35%, the robo-advisor makes portfolio adjustments to keep an overall portfolio balance.
The first versions of what we’d call a robo-advisor emerged in 2008, when Betterment and Wealthfront were launched to make regular investments simpler and more accessible. Since then, the space for robo-advisors has boomed. Currently valued at $9.5 billion, this particular market is projected to expand to $72 billion by 2032, a growth of nearly 29 percent.
ADVANTAGES.exe
The chief strength of a robo-advisor is its ability to reflexively react to market trends. A client doesn’t need to check in with an advisor during office hours — they can log in 24/7, see how their investments are doing, note market trends in their portfolio, and make holding adjustments all on their own.
For clients who need a lot of agency in what goes into their portfolio, a robo-advisor provides instant and customizable options. They get to decide the margins which are best for them and don’t have to wait to see them implemented. Some robo-advisors can be optimized to build socially-responsible portfolios, such as only seeking out investments in environmentally-friendly companies or gravitating towards green technology.
The lower cost could also be appealing to clients with less money to play with. A typical robo-advisor charges a fee of about 0.4% per specific account, much less than average rates taken by a typical human financial advisor. Since clients wouldn’t have to pay as much for automated services, they might be more willing to dip their toes into the marketplace.
DISADVANTAGES.exe
While automation is one of the flashiest appeals of a robo-advisor, it’s also a downside for those who don’t want a kneejerk approach to their investments. Many have critiqued robo-advisors for lacking empathy and sophistication in their choices. Sudden, unwanted changes to someone’s portfolio, even if it’s within parameters, can be unsettling and make a client feel removed from their investments.
There’s also something people prefer about the human touch. People like having someone they can talk to over an online, automated responder. Further still, clients feel more at ease if they know (and trust) a tangible person at the helm — leaving their retirement funds in the “hands” of ADVISOR_ONE.obj isn’t exactly reassuring to older investors.
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As with artificial intelligence, using a robo-advisor in your practice could prove to be a useful supplement to your current skillset. But overreliance could damage your credibility and incur unnecessary losses for your clients’ portfolios. A financial advisor’s best bet is to take a moderate approach and see how software, when used, enhances their practice’s existing abilities.
The ability to tailor a robo-advisor to a client’s specific needs — like the socially-responsible portfolios mentioned above — is a great selling point. Use it to show that you’re responding to clients, not bringing in a series of your own biases. Alternatively, use your human experience to show you know how the market works and don’t need digital guardrails to stay in line.
Whatever your approach, know that the latest tech isn’t always the greatest. Stay informed, stay on top of trends, and soon you’ll be the kind of advisor a robot wishes it could be.
