I love the file The Terminator, in which intelligent machines wage war on the humans who created them. At least there are no plans to arm robo-advisors! But could they still betray us and leave us destitute? If they’re intelligent, then should we fear them? If they’re dumb, then why on Earth would we want to entrust our money to them?
A Brief History Of Robo-Advisors
Online investment portals have been around since the 1980s. They pre-date the invention of the World Wide Web. They allow consumers to buy and sell their own securities online, without any need to phone their broker. However, with a standard online portal, consumers have a choice; they can either make their own investment decisions or seek advice from a human.
Investors requiring advice have traditionally turned to financial advisors and wealth managers. Many such advisors have access to a variety of decision support tools. They rely on these to help shape the investment advice they give to their clients. The clients themselves would not have access to these tools.
Around the time of the 2008 financial crisis, an innovation in investment services emerged. This was new online investment portals that allowed consumers to directly access and make use of decision support software. Instead of selecting individual stocks and bonds online, consumers could hand over funds to the portal. The software would allocate and invest these funds based on an algorithm. The tangible advantage of this to the consumer was that the fees were much lower than for human advice.
These new portals were later dubbed robo-advisors. In the years since the first emergence of robo-advisors, they have steadily become more sophisticated. Originally, they offered relatively passive buy-and-hold services. Some now offer more actively managed services that take into account consumers’ individual attitudes and preferences.
In theory at least, there’s no limit to what could be automated. It’s not hard to visualise an online service to which you’d give automated control over all your bank accounts and investments. An algorithm could base its decisions upon all the information available to it, by making future forecasts and projections. It could move money between your accounts and investments. It would base its decisions on what it calculated was best for you at the time. If desired, it could even put limits on your ability to spend money, to enforce the cash flow budgeting that it calculated for you.
The technology for doing this is within reach today. However, the current generation of robo-advisors limit themselves to investment portfolio management. Human advisors still tend to provide cash flow management, tax planning and retirement planning services.
The big question is whether you would ever want to hand over every last financial decision to a robot. How confident would you be that it was acting in your best interests? How would you assess its expertise? What if something went wrong, resulting in a major financial loss?
Effectively you’d be giving power of attorney to a robot. Of course, there are similar concerns when giving power of attorney to a human. Between family members it requires huge trust. At the professional level, it requires not only trust, but a sound legal relationship.
Personally, I believe that the general public will gradually become more and more comfortable with the technology. It won’t happen overnight, just as it took time for many people to become comfortable with e-commerce. The convenience and cost-effectiveness of e-commerce has driven its growth. Likewise, the quality of the results obtained from robo-advisors will drive their growth. The younger generation will no doubt lead the way, since they will have grown up with more digital technology than the older generation. Once robo-advisors consistently outperform human financial advisors for the same services, only technophobes will avoid using them.
Some people may always want to retain some involvement in their own financial decision-making. The rich may always wish for themselves and their trusted human advisors to oversee their decisions. Even this might change though, if human involvement led to worse results.
There are a number of niche robo-advisors in the market, focusing on investment portfolio management. Some of the large wealth management firms are also rolling out their own platforms as part of their services.
The situation with cash flow management, tax planning and retirement planning is different. There are many online tools that consumers can use to project future scenarios based on present assumptions. Most of them are designed to give only rough and ready projections. For example, they may assume that investments grow at a constant rate of return. Or they may assume that funds must last for a fixed number of years. Some are more sophisticated, and can run Monte Carlo simulations to take account of uncertainty.
But nearly all of them are designed to answer this question:
A) Based on my current choices, how likely am I to run out of money before I die?
There’s a much more useful question to answer, which is:
B) What choices can I make now, to maximise my lifetime chances of a good financial outcome?
Once robo-advisors are able to answer question B reliably, the finance industry will start to change a lot. Eventually, the focus of human experts may shift to improving the accuracy and performance of the algorithms used by robo-advisors.
EvolveMyRetirement® is a unique planning tool. It’s not a robo-advisor, because it has no access to your money. However, it has features that are lacking in the current generation of robo-advisors. It’s to be expected that such features will be incorporated into robo-advisors of the future.
Using EvolveMyRetirement® is completely free. It takes a big-picture view of your finances, whatever your age or wealth. It helps you onto a sustainable spending path. Sustainable means that retirement should not be a spending cliff-edge. It’s the only online calculator specifically designed to answer question B.