Maybe you haven’t heard of Robo Advisors yet…or maybe you’ve even used them without knowing it, and without being fully aware of just how much technology is invading everything. But the truth is that Robo Advisors are all the rage on Â Wall Street.
But, the question that must be asked before running after any financial trend is: What is really behind these Robo Advisors? In today’s analysis we will explain exactly what Robo Advisors are, their pros, their cons, and their potential risks. It is our professional commitment (and even personal one) to bring you not only the news, but also give you the keys and the reasoning so that you can reach the best conclusions possible.
Robo Advisors: hand in hand with Artificial Intelligence and mass computing capability.
We could say that the predecessor to Robo Advisors was the automated investment with very simple algorithms, and whose progressive complexity and intelligence has led them to become known today as Robo Advisors. I already wrote about them in the analysis entitled “Robo Advisors: Best of Both Worlds?” Those conclusions are perfectly valid today for Robo Advisors, and in that article and I warned of the great risks that are assumed by fully delegating the management of our money to an algorithm.
One of my conclusions was that, today, these algorithms can not compete in certain aspects with the human mind, which is much more creatively prepared for improvisation before the unknown. But it is no less true that the human mind is also much more prone to error, both by an involuntary error and by falling into passively irrational behavior.
What has made Robo Advisors so popular right now?
Some of the pros and cons that I did not analyze at the time are, for example, that Robo Advisors have become so popular because they drastically reduce brokerage, negotiation and management costs. Obviously it is much more affordable to have software working uninterruptedly, at lightning speed, and at a much lower cost, than having an entire room crowded with bustling stockbrokers following the market, observing indicators, and continually entering buy and sell orders.
Additionally, Robo Advisors, also provide flexibility, since if demand is increasing, or if demand peaks are anticipated, it is infinitely simpler to rebalance an portfolio accordingly. The corresponding human would involve hiring dozens (or hundreds) of new brokers, training them in corporate tools and policies, equipping them with physical space, furnishing them with furniture and equipment, and so on. etc.
On the other hand, undoubtedly, the Robo Advisors’ boom and their incremental popularity is also due in part to the advances in artificial intelligence, high computational capacity available at low cost, massive data processing, and deep learning.This training of Robo Advisors to prepare them for market situations is implemented with leading technologies such as neural networks.
The human factor: that key aspect in financial advice
The fact is that these new synthetic economic agents, Robo Advisors, have gone a step further in the automation of the financial world is a new very relevant aspect that I’ll analyze today for you: the human factor.
But when we speak about this “human factor,” it is not understood as the human intellectual capacities of higher order, but rather, I am referring literally to human interpersonal dealing. In any case, more experienced investors already know that those impulsive decisions taken in the heat of a stock market crash, in almost all cases have proven to be great errors over time. You probably could have (literally) saved yourself from these errors if you had an experienced consultant at your disposal at that very moment of panic. And of course, in all aspects of financial advice that are part of that “human” factor, a Robo Advisor knows nothing about it (nor does it possess the emotional element that humans possess).
The keys to a management for which Robo Advisors do not serve (for now)
How do Financial Advisors with an eye on the long run manage to keep investors calm during periods of crisis? Because true management means that you move funds, analyze balance sheets, look for new opportunities, cross buy-sell orders, hedge positions. But really, the heart of management means that you reassure investors by phone or in person, explaining the long term strategy so that they do not withdraw their assets and end up crippling the fund. A human touch that no robo advisor could ever provide.
Years of experience in the markets have allowed me to develop an investment ethic, for which not all dollars are worth the same amount. There are dollars that are worth a lot, and there are others that are worth nothing at all. Â Yes, a robo advisor may provide the cold discipline to continually optimize and rebalance a portfolio. But only a human can truly respond to the nuanced needs of individual investors with changing expectations, forecasts, and needs that life throws at them on a daily basis. Long live the financial advisors.