Typically an investor will provide a series of answers about their goals, risk tolerance and personal finances to the Robo Advisor, which will then run the information through its algorithms and accordingly recommend investments to fit the needs of the investor. Essentially, this is the same route followed by human financial advisors: important information is gathered, calibrated, and then recommendations are made to the investor in a later meeting. The appeal of the Robo Advisor here is obvious: first of all, you no longer have to wait between one meeting and the next for a human to make calculations that a machine could make in minutes. Secondly, many Robo Advisors are completely free, and even those that aren’t will be significantly cheaper than using a human advisor. Some major providers of Robo Advisors include Betterment, Blooom, FutureAdvisor, Motif Investing, WealthFront, Personal Capital and WiseBanyan.
Of course the Robo Advisors have limitations. Many of them are unable to make recommendations about individual stock investments, working mainly in ETFs and index funds. They aren’t capable of dealing with cash-flow, budgeting, retirement, insurance, taxes or estate planning. A Robo Advisor can only be customised within the limitations of its algorithm. But all the same, it has been reported that Robo-Advisors were managing around $19 billion worth of assets by the end of 2014, a 65% rise from the influence they had in April of that year. The investment group, mainly Gen X and emerging businesspeople, have grown up in a different world to the baby boomers. Financial advisors may find that they need to adapt or sink.
The good news for financial advisors is that while Robo Advisors are becoming increasingly popular, it seems that for some, it is not simply a case of choosing either a Robo Advisor or a human one. For some investors, the Robo Advisor can make the first recommendations, but there is still value to be had in talking to financial advisors about the human elements: fears, motivations, unique life situations. Robo Advisors may be changing the way the financial landscape looks, but it’s still possible for financial advisors to use them to their advantage and work alongside them, rather than simply running from them in fear.
The world of today is driven by technology. We connect even to our real life friends using social media; we send text messages; we talk to our phones and have a machine answer us. It makes perfect sense that we want to make use of that technology in every way we can, particularly when it comes to financial investments. Robo Advisors are almost certainly here to stay, but until they develop artificial intelligence, this doesn’t mean that people won’t still appreciate the human touch.