A robo-adviser is an online persona that uses complex algorithms and cutting-edge software to build/manage investment portfolios. Could such a persona pose a threat to human financial advisers?
What are the advantages/disadvantages?
The main advantage of robo-advisers is the low cost. They are considerably cheaper than paying for human financial advice. You are also unlikely to pay transaction fees or commission if using a robo-adviser.
In terms of disadvantages, there is always some suspicion when it comes to technology, and no computerised system is 100 per cent foolproof or safe from hacking/malfunctioning. Some investors want human interaction and would prefer to leave their portfolio in the hands of someone they can trust on a human level; furthermore, humans have instinct – computers do not.
How do robo-advisers work?
Most robo-advisers will start with an initial questionnaire that they use to get an idea of your risk tolerance, investing preferences and goals. They tend to build their portfolios from inexpensive exchange-traded funds or index funds – these are a ‘basket’ of investments that will track an index such as the S&P 500 or the FTSE.
Who is using robo-advisers?
The use of robo-advisers in the UK is on the rise but is still far less prevalent that in the US, where the amount of assets handled by leading robo-adviser firms at the end of 2014 reached $19bn (£14.6bn).
Robo-advisers are popular amongst individuals who want some control/overview of their investment portfolio but do not want to deal with the day-to-day hassle of managing it themselves.
Robo-advisers are among the most advanced back office systems for IFAs. The majority of the latest systems are, unsurprisingly, web-based and designed to manage risk and increase profits and returns for clients. If you are financial adviser and want to see the latest back office systems for IFAs, consult a specialist to see what is available.
Joint effort/the future?
Some larger financial service companies have begun using robo-advisers in tandem rather than in place of human financial advisers. These companies use robo-advisers for transactional purposes and make use of their algorithms; in addition, clients are offered the services of human financial advisers, usually via a set number of meetings/phone calls each year.
This way of using human and robo-advisers together could well be the future of the industry.