Tech

Trust me – I’m a robo-advisor (with the human touch)

posted by Chris Valentine

April the 19th 2011 – the day when Skynet was supposed to have become self-aware, has come and passed, and human-kind is still in charge of things. However, robots are making incursions, and into a very important facet of our existence – our finances. Robo-investing is here, and it looks as though it’s here to stay.

Robo-advisors are a relatively new phenomenon of the Fintech industry. The first ones appeared back in 2008; spookily the same year of the global financial meltdown. Shades of Skynet? No; their appearance was actually nothing to do with the slump. In fact, if anything, this was a development that followed the crisis.

The arrival of the robo-advisors

Prior to 2008, wealth-management was entirely in human hands – the hands of the independent financial advisors. Many of them used wealth-management software to help them, and they charged anywhere between 1% and 3% for their services. When the first robo-advisors were launched, the product then became available directly to investors without any middlemen.

Initially, of course, many would-be investors were highly sceptical, and although there is still a lot of scepticism today, by the year 2020, there will be in the region of $8 trillion worth of assets under robo-advisor management according to Business Insider. So, what’s behind this trend? What is that tempts people to trust their finances to a robot?

The cost of humans managing your investment

The fact is that the majority of people know very little about the mechanics of investing; therefore the majority of us tend to use an independent financial advisor (IFA) to guide us. But of course, that costs money. Depending on the IFA you choose to work with, fees can vary enormously. According to a table published in the Telegraph, on a small £5,000 investment in an ISA, you can pay anywhere from 0.89% to 2.4% per annum.

With something like a stocks and shares ISA, this covers the management of your investment, to ensure it is earning the best interest rates, and if necessary changing your investment portfolio to keep it on track.

Would you trust a robo only advisor?

A basic robo-advisor won’t charge you anything. But although this sounds great on the surface, underneath, there are drawbacks. Robo-advisors use algorithms to create a savings portfolio tailored to your circumstances and your appetite towards risk. Once created, it cannot be changed. You have no involvement in how things progress. You simply have to put all your trust in your robot.

The three laws of robotics don’t mention protecting your investments

  • A robot may not injure a human being or, through inaction, allow a human being to come to harm.

  • A robot must obey orders given it by human beings except where such orders would conflict with the First Law.

  • A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.

Unfortunately, there is no mention of protecting a human being’s financial investments. Okay, Mr Asimov’s robots and robo-advisors are not quite the same thing, but I am sure you get the drift. It’s this lack of trust that is the prime reason that robo-investing only appeals to some.

The theory of evolution and the robo-advisor

Most things in life evolve, and robo-advisors are no exception – something that Mr Charles Darwin would no doubt appreciate. Some robo-advisors are evolving by bringing in that good old human touch.

Instead of simply letting the algorithms take care of investments, come hell or high water, there is a new breed of robo-advisor that backs-up the algorithms by having a skilled, experienced, human financial advisor keep an eye on how portfolios are performing. Yes, there is a charge for this service, but it is smaller than the charge that would be levied for a full management package.

A robo-advisor plus could well be a plausible consideration

Up until now, you may well not have been too keen on letting a robot have complete control of your investment, but with the addition of that all-important human touch, a robo-advisor plus, it could now well be a plausible consideration.

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