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Robo-Advisor: Future to Financial Management?

What is Robo-Advisor?

A Robo-Advisor is an artificial intelligence based virtual financial advisor that provides automated financial planning, generated by algorithm driven software with very little or no human involvement. These advisors collects precise information through online surveys from clients and use this information to plan and invest client’s assets to diverse fields. The term Robo-Advisor should not be confused with a physical robot as robo-advisor is just a software based on almost same artificial intelligence that derives a physical robot. Clients can interact with these advisors through their smartphones, can use apps or a simple web browser to convey their information and get feedback based on that information. They are available all the time that is a major advantage of this system over conventional financial advising system. Even financial agents sometimes use robo-advisor for quick reply to their clients. A robo-advisor is a good option for those who don’t want to hire a financial advisors or kind of do it yourself like business persons or for those who don’t have enough to pay the high prices of financial agents. Moreover robo-advisor can built a diversified portfolio for you in no time and give you thousands of options while a financial agent will take huge time to figure out that. Is using robo-advisor right or not, depend upon your financial conditions, your interests and your financial assets.

History of Robo-Advisor

When the world was facing financial crisis of 2007-2008 the first financial robo-advisor was launched by Jon Stein named Betterment and since then its popularity is growing. First they’re introduced as an online interface to hold investments to rebalance assets of clients. This was not novel in financial field neither technology was some kind of new addition to the field. Financial advisors and managers have been using this kind of software for automated portfolios since early 2000s. These software were quite efficiently used in the advising field but they were used by only financial advisors and managers until 2008, and people had to hire some advisor to enjoy this innovation. In 2008 they were first time publicly available and were purchased by people who were confident to do it by yourself. This was the first time that these robo-advisors delivered services directly to clients without intervention of a middle man like financial advisor. After continued innovation in information technology and development of more than a decade these robo-advisors are handling complex situations like tax loss harvesting, give you retirement plans and providing investment opportunities and options. This technology is evolving day by day and getting popular among general public; at the end of 2015 robo-advisors hit $60 billion assets of clients managed by them and it is estimated that it will cross $2 trillion by 2020. In 2016 Nevada State Treasurer joined hand with robo-advisor Wealthfront and launched plan-529 for college savings.

Advantages and Disadvantages of Using Robo-Advisors

Advantages

They are available all the time at your fingertip with comparatively lower rates of 0.2% to 0.5% of total amount while financial advisors cost 1% t0 2% and potentially more of commissioned accounts. They are easily accessible, you don’t need to talk them on phone for appointment, and it saves human labor. Robo-advisors have much lower minimum asset limit normally $5,000 is standard limit while Betterment the first robo-advisor don’t have any lower limit at all. On the other hand human advisors prefer to take clients of at least $100,000 assets as in return they can afford their divers management services. One of the key advantage of this investing system is that they don’t commit big investing blunders, as it has been noted that most of the investors get emotionally charged and take wrong decisions that force them to poverty. Another advantage, it reduces mental stress and fear, you don’t need to worry about technical details after you have given the proper information and have customized your robo-advisor. Efficiency also gives upper hand over the traditional method of financial advising. They don’t get tired, they don’t cheat and they don’t have mode swings or emotional problems.

Disadvantages

It is our general perception that machines are perfect, they don’t commit any kind of mistakes. But this is not right perception, machines do commit mistakes, they are designed to use algorithms but not predict exact future. If software commit some wrong doing technically or through any other way, you can’t hold software accountable for that, and even you can’t sue them in court. It is also proved that robo-advisors are less flexible than human advisors, as they don’t have the capacity to understand our lives. One of the key disadvantage is that these software are created on the principle of “one size fits all”, they are not customized for each client, so as human advisor can adjust himself within no time with change in situation, software advisors are difficult to handle in that situation.

Do-It-Yourself Robo-Advisor Financial Advisor
Fees for Management Low Medium High
Flexibility Low Medium High
Lower Limit Low Medium High
Time Saving Low Medium High
Who Can Hire a Robo-Advisor?

Anyone with internet access can hire robo-advisor. Robo-advisors are popular among Millennial and Generation X, who are technologically dependent and more comfortable to share their information online assigning critically important tasks to software such as asset management and financial investment. As technology continues to improve so robo-advisors are also getting popular among Baby Boomers with high net worth as well, shown in recent research conducted by Hearts and Wallets. This research shows that half of investors using this software system are old ages from 53 to 64 and one-third retirees manage their investment asset through robo-advising.

What is Legal Status of Robo-Advisor?

U.S Securities and Exchange Commission register robo-advisors and they have same legal status as human advisor, so they face regulations, securities and laws. Robo-advisors are given member status under independent regulator Financial Industry Regulatory Authority (FINRA) as well. Federal Deposit Insurance Corporation (FIDC) does not provide insurance to robo-advisor managed assets as these assets are held for investment not as bank deposit. But this doesn’t risk investor’s assets as there are other means to insure your safety. The second most popular robo-advisor company Wealthfront provides insurance under Security Investor Protection Corporation (SPIC).

Worldwide Comparison of Robo-Advisors Service

Here is detail of asset management under top ten world organizations that provide automated and human assisted robo-advising services worldwide.

Largest Robo-Advisors with respect to Assets under Management
Sr. No. Company Name Assets under Management Country Investing Advice
1 Vanguard $101 billion United States Human Assisted
2 Charles Shwab $24 billion United States Human Assisted
3 Betterment $13.5 billion United States Automated
4 Wealthfront $10.2 billion United States Automated
5 Extrade $3.9 billion United States Human Assisted
6 Nutmeg United Kingdom
7 Wealthsimple $1.5 billion Canada Human Assisted
8 Future Advisor $1.1 billion United States Automated
9 Acorns $545.1 million United States Automated
10 Rebalance USA $525.1 million United States Human Assisted