Providing financial advice was once a costly and time-consuming process that entailed face-to-face interactions and back office administration. Traditional models of financial advice could not break even for those with less than $1 million in assets. As a result, most Americans have been excluded from private banking and wealth management. But with the rise of robots in the finance world, all that is about to change. Here are five reasons why people trust robots with their money.
- It’s accessible to everyone
The best human advisers consider capital markets conditions, build diversified portfolios for clients and keep portfolios on target to reduce risk. All of these tasks (and more) can now be delivered through algorithmic analysis and management. This changes the very economic tenets of the industry because scale is now a reality. Work that once cost each client individually can now be spread across a wide population base. Today, millions of US households can access these services.
- It’s likely to get more trustworthy results
Digital financial management means that more clients can be served and better outcomes delivered. In fact, the outcomes may be better than traditional management. In taking a full view of household accounts, digital asset managers can provide complete, household-wide solutions – the type that the work of Nobel Prizewinner Harry Markowitz argued for in the 1950s. The best digital wealth managers construct portfolios with visibility into all investment assets.
- Automated wealth managers are more disciplined
DALBAR studies have shown that investors can lose as much as 4% a year simply by second-guessing themselves and leaving the market at the wrong time. Digital financial advisers provide discipline through a rules-based and objective approach to investment.
- It’s tax-efficient
Digital managers shine by managing assets in a tax-efficient manner, using techniques such as tax-loss harvesting and tax-efficient asset placement across savings vehicles. Financial strategies that include gains from tax efficiencies are generally much lower risk than those that rely solely on beating the market.
- It’s personalized for every household
There is a misconception that all “robo advisers” recommend the same strategy. The best digitals consider your existing securities and capital gains before making any changes to one’s investments. They also help people reach other goals outside retirement. For instance, they automate college savings plans, hand-holding clients through the confusing process of what types of accounts to open and how much to save. These types of activities will make management more “personalized” and robust than most human advisers, especially those serving the mass-affluent market.
Digital investment managers have the potential to get entire generations on track to reach their financial goals. These services are not solely for millennials – our average client is aged 42. Policy-makers should embrace the role technology can play in reducing the population of elderly poor in future decades. The role that digital advisers will play cannot be underestimated.
Full details on all of the Technology Pioneers 2015 can be found here
Author: Bo Lu is CEO and Co-Founder of FutureAdvisor, a World Economic Forum Technology Pioneer.
Image: A man shakes hands with a robotic prosthetic hand in the Intel booth at the International Consumer Electronics show (CES) in Las Vegas, Nevada January 6, 2015. REUTERS/Rick Wilking.