What is Robo-Advising?
Robo advisors are software platforms that use algorithms to offer automated investment services with minimal human input. They often get clients to answer short surveys regarding their financial position and their aims for the future which are then utilised to provide help and invest assets. Robo-advisors are often seen as superior to traditional human advisors, especially for less confident clients as they charge much lower fees and account set up is extremely quick.
Having been around for approximately a decade, the robo advising industry has grown exponentially, largely due to drive from the younger, tech-savvy millennial and Gen Z generations, and it is expected to be worth $1.2 trillion by 2024.
Robo Advisors vs Financial Advisors
Due to the algorithm-driven nature of robo-advisors, they are capable of automating and executing procedures much more efficiently, more affordably, and with minimal human error than traditional human advisors. For example, many robo advisors are able to carry out portfolio rebalancing – which means realigning weightings of asset portfolios to maintain a desired level of risk – at a much quicker rate than human advisors. The only client input is when the robo advisor asks how much investment risk to tolerate and also time horizon – the period over which investments are held until required.
However, it can be argued that the added value of using a human advisor is seen through the ability to give more personal, tailored advice – giving guidance to clients on house buying and car buying, becoming an entrepreneur, etc. Moreover, algorithm-based services are not the most reliable when dealing with specific circumstances, e.g managing money inherited from family relatives, or trying to manage money during market instability, which would be unideal for entrepreneurs seeking financial advice.
The ‘Hybrid Model’
A ‘hybrid model’ of robo advisor has been implemented to combine the advantages of both types of advisory into one package. This model can involve a human advisor interviewing clients about their financial situation and then redirect them to robo advisors best suited to their needs. The model has proven popular with customers, with almost 70% of wealthy investors preferring to use a hybrid service over a traditional financial advisory system, according to a 2018 Accenture survey. Additionally, it has also attracted aspiring advisors due to the lack of a need to sell products or find customers.
Many spectate that this hybrid model is likely to be sustainable for the immediate future of financial advisory services, due to the empathy aspect of human advisors that cannot yet be matched by software and algorithms, although there is still controversy surrounding the quality of such a model.
What are your thoughts on using algorithms to provide financial advice? Would you see yourself going traditional and relying entirely on human advice, or would you rather use a robo advisor or even a hybrid of the two?
James Gordon, University of Warwick