Rise of the Machines - Robo-Advice
It’s the latest development in the financial services sector, but will the use of robo-advice worry investors who would prefer to have a human being make the decisions about their investment portfolio?
Okay, let’s start by saying that the Terminator has not started a lucrative side-line and become a financial advisor.
Your fund manager is not about to be replaced by a machine that does not wear a nice suit and forgets to offer you a cup of Lapsang Souchong when you visit the office. Robo-advice is a somewhat derogatory term for computer algorithms that are designed to provide an alternative to the human decision-making process behind an investment strategy.
Wall Street to Silicon Valley
These algorithms started to come to prominence with stock market trading when it was discovered that clever computer programmers could write code that was better at trading stocks than human traders. Hence, there has been a move away from Wall Street to Silicon Valley, and traders such as the legendary (and fictional) Gordon Gekko of the 1987 film Wall Street are fast becoming a thing of the past. Latest figures show that some three-quarters of stock market trades on the US indices are now automated. The ‘big mouths’ of the trading floors are fast becoming a thing of the past.
And from there, it’s not hard to figure that complex algorithms can be used to run an investment portfolio. After all, the big advantage with a computer is that it has the ability to think big. It can handle the vast amounts of data available out there, and it can make quick decisions based on its ability to spot trends and react far more quickly than any human. The computer investment programme is a massively complex and sophisticated tool, and whether we approve or not, they are here and are being used extensively.
Human Advisers Lose Their Jobs
RBS was one of the first major UK banks that came out and said that those customers who have less than GBP 250,000 to invest will be given robo-advice. Some 200 human advisers have lost their jobs as a result. This trend is occurring at the lower end of the market and is being driven by cost. Once a computer algorithm is developed, it can be used at a fraction of the cost of using traditional stock brokers and fund managers.
But, this is just the start. Let’s be honest: one of the reasons for the increasing use of robo-advice is that many human fund managers are not that good. Research suggests that almost 90% of traditional funds in the US have underperformed over the last five years when compared to their benchmarks.
It’s already likely that your investment adviser uses computers as a foundation for investment planning. It’s not just cost and their success that drives the development of computers into investments; it’s also because computers are learning how to be better. The advances in artificial intelligence mean that computers adapt way faster than humans. And what’s more, they don’t come with emotional chips, meaning that they don’t have bad days at the office and don’t have mood swings!
So, when you hear the phrase robo-advice, rid yourself of the Arnold Schwarzenegger image and think computer code; in fact, forget all that, just sit back and let the humans act as intermediaries, telling you what their wonderful computer has done for your portfolio. As for what might go wrong, that’s another story!