Robo-Advisors: The Middle Ground Between DIY Investing And Traditional Advisory Services

23 Dec 2020

CEO of Fortu Wealth, which envisions private banks offering clients digital wallets designed for payments and alternative investments.

Members of Forbes Finance Council share simple first steps to help you start actively managing your finances. PHOTOS COURTESY OF THE INDIVIDUAL MEMBERS.

As the transition of wealth from baby boomers to millennials continues, how this money will be managed has come under question. Specifically, will younger generations’ increasing interest in DIY investing change traditional investment advice as we know it today?

Recent IPOs and tech company valuations have put professional advisors in an uncomfortable position, as valuations are no longer driven by rational analysis and financial modeling, but rather by crowd psychology and behavioral finance. The growing number of retail investors and increasing access to various investment tools are creating a new market driven by emotions and hyped loss-making special-purpose acquisition companies (SPACs).

This is part of a growing trend, particularly among younger generations, of do-it-yourself (DIY) investing rather than spending money on financial advisors. In one 2019 survey, 99% of respondents said they do not use financial advisors. The reasons experts cited for this include the cost of advisory services, the availability of free information online and an unclear value proposition.

But consider this: Another survey of over 1,000 investors in the U.K. found that advised investors had better returns than DIY investors, as DIY investors typically hold more cash in their portfolios. 

It’s undeniable that the internet has taught us to be self-reliant. The proliferation of educational online research tools and the advent of commission-free brokerages and other investment platforms make it easier for investors to learn on the go and make more informed decisions by themselves. However, tying together all the variables of a good financial plan and building out an efficiently managed portfolio can be challenging. Getting all your financial essentials in order can be time-consuming and requires extensive knowledge.

Nevertheless, the world of investments continues to open up online. The DIY approach is pervading many activities that were traditionally performed by trained professionals. Nowadays, retail investors can access top analytic reports, trade intraday via user-friendly apps, do asset-backed lending and take part in venture capital investment. 

Certainly many helpful tools and the unprecedented accessibility to powerful investment vehicles make it easier than ever for investors to research and implement savings and investment goals. However, more choice can complicate decision making.

The question is whether curated robo-advisory experiences can replace traditional relationship managers. Relationship managers and investment advisors have limited time to educate and guide each new investor on the challenging path toward mastering their investments. Robo-advisors, which do not have these same time constraints, could take on some of these advisory roles. Curated robo-advice could provide a learn-and-invest-as-you-go solution at the pace a DIY investor wants. Automated algorithms would be aided by their access to big data and global trends in real time.

Another important element is the cost. Roboservices are cheaper, reliable, scalable and more accessible. Machines tend to make fewer mistakes, and the growth of AI and terabytes of user data combined with computing power can create a much smarter algorithm than a seasoned investment advisor with their own biases and beliefs. Algorithms can analyze investors’ behavior and know what, when and how to sell them best. 

However, robo-advice as we know it now is still in its early stages and is mainly used as a passive investment strategy, where investors are offered a template portfolio and strategy. But in the future, robo-advisors may move toward curated investment experiences, where a digital advisor helps clients to build their DIY portfolios while patiently explaining the process and options step by step and helping clients manage the fear and greed that each new investor goes through.

Some people also claim that algorithms could never replace human contact and emotional intellect and that investment advice is not only the art of finance, but of psychology, as well. I think the future will include a combination of both human and robo-advisory services, each playing its own role. Ultrahigh net worth individuals with complex wealth structures will still need to have in-person expert advice.

Robo-advisory services have the potential to cater to a wide group of people, including those who do not currently use financial advisors. This provides a revenue opportunity in creating educational, curated investment experiences with behavioral analysis through AI-driven robo-advice.

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