Artificial intelligence is more than just a buzzword; it’s an inevitable reality. While robots might not walk, talk and live among us, through automation technology they are still making their way into our lives, streamlining everything from our day-to-day routines to our business activities.
Robo advisors are the new craze in the world of personal finance and investment… Okay, the term might be misleading as they really have nothing to do with robots – at least not in the traditional sense. However, they certainly emphasise a direction of travel, one which demonstrates just how powerful automation technology is becoming.
What Exactly Is A Robo Advisor?
Robo advisors are online investment platforms designed to take clients through the investment process automatically, so that independent financial advisors (IFA) can be bypassed. In a nutshell, most systems will ask clients around 15 questions related to earnings, savings, age, investment goals, risk appetite and expectations – the same questions an IFA would ask. This information is then processed in order to allocate savings and investment products that match the results.
Until January 2013 the majority of IFAs earned the bulk of their income through commissions earned on investment products, including the upfront payment and a percentage of continued contributions. However, the Retail Distribution Review (RDR) banned these commissions in order to encourage IFAs to actively push clients towards products that would be more beneficial to them.
After these changes IFAs started charging an up-front fee for advice, which had previously been offered free of charge. These fees were off-putting to smaller investors, leaving many unable or unwilling to pay for them. Robo advisors were essentially created to fill this void.
As the process of “robo advising” is automated, the majority of expenses are removed; therefore, the cost for the client is reduced – usually to around one percent of the investment. Additionally, robo advisors offer a more convenient solution as clients can conduct the whole process online, including keeping track of their portfolio. They will also manage and change investments on-the-fly in order to align more accurately with the target goal, and possibly even conduct automatic tax-loss harvesting to reduce tax bills.
What Are The Benefits Of Using A Robo Advisor?
Due to the reasonable service fees many people look to robo advisors in order to build a more diverse investment portfolio. In addition, the majority of services offer trial periods so potential investors can gain a greater understanding of the process before they choose to invest real money.
However, the biggest benefit of using robo advisors is the reduced chance of making costly investment mistakes. In the past, investors have been known to make decisions based upon emotions, gut feelings and self interest, which can greatly increase the risk and have a poor outcome. Software does not make these mistakes. This can reduce stress for investors who feel pressured into making decisions that might not be in their best interest.
Robo advisors are best suited for young professionals, first-time investors who want to place their portfolio on automatic, or investors looking for the most simple solution possible. However, those who have stock options, need to facilitate benefits, or have a heavily customised approach, often prefer to stick to traditional IFAs.
Assets under robo advisors now equate to roughly $200 billion; however, this figure is expected to triple by the end of 2017 with capital investment figures potentially reaching $8.1 trillion by 2020. Fundamentally, they are causing quite a stir in the personal finance and investment sector, one that should not be ignored.