Will Robo Advisors Make All Your Investment Decisions?

Adnan Manzoor - Author

Feb. 21 2017, Updated 3:05 p.m. ET

Imagine you click to open the website of your financial advisor and instead of reading boring contents, you are greeted by a bot who provides you all the information and based upon your information and habits, give you a complete roadmap for your future investment decisions?

Welcome to the world of robo-advisors, the bots that make all the money decisions for you and suggest you everything you may do to make a profitable bet on the stock market or somewhere else.

Robo Advisors, per a recent report by My Private Banking Research, are becoming popular with many high-net-worth individuals.

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Robo advisors are a new breed of financial advisors offering financial advice with minimum human intervention. Heavily loaded with technology and complex algorithms, robo advisors make all the decisions and allocate and reallocate a client’s assets for optimal performance.

Considering this new technological innovation in the financial services market, there could be many implications for medium to high net worth individuals looking to find ways to improve their returns and make more money.

A Financial Advisor talking to his client. [Image by Justin Sullivan/Getty Images]

Financial services industry is traditionally dominated by the legacy companies staffed with people having years of experience and relevant professional qualifications to their credit. A more traditional weakness of this model is the high cost of advisory services.

Robo advisors exactly attempted to fill this gap and provide an alternative platform to those people who wanted to invest but lacked the necessary resources to afford high-cost advisory services to pick and choose various investments in their portfolio.

Such advisory model was also meant to appeal to the young lot with little but stable income sources to tap into a low-cost investment advisory.

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But this new technological move is set to make a drastic shift not only in the job market for financial advisors but may also set a challenge for many to make a quick change to a more hybrid model of financial advisory services.

Couple looking at a computer spreadsheet. [Image by Fox/Getty Images]

One thing which is logically different from the popular advice given by Warren Buffet to all ordinary investors is to invest in index funds. This simple investment strategy defies all the hype created around the use of technology in making financial decisions.

Investing in low-cost index funds is considered a perfect investment by the likes of Warrant Buffet which completely overlooks the use of complex algorithms and technology to make investment decisions.

What is even more interesting is the fact that robo-advisors are largely dependent upon the wisdom behind the models which run them. A small glitch in the model and investors can lose millions of dollars just by relying on the advice given by a bot.

Even though Robo-advisors use complex algorithms, they are mostly limited to common sense advisory services. This limitation may restrict their overall utility for more sophisticated investors with complex needs to analyze their investment requirements.

Though FinTech is poised to make lives easier for many especially the lower-middle and middle-class investors by providing them with a platform to invest and get advisory but how long it will prove to be a viable platform needs to be checked.

The traditional model seems to have a clear advantage when someone sees the investment philosophy of Warren Buffett. Without using any technology and programs, he has been successfully picking up stocks.

So, can the technology replace human wisdom behind picking up right stocks? Maybe or maybe not. One thing is clear though that few things are being fundamentally changed in the financial services industry with new technological innovations and changes on a big level. It’s time for most financial advisors to change and accept the new reality and align themselves with a new working environment dominated by computer bots.

[Featured Image by Bloomberg/Getty Images]


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