Algorithms and computers are making waves within the financial advising industry, as so-called robo-advisors offer customers an opportunity to invest both easily and wisely.
Automated investment services, which provide advice on topics like portfolio allocations, could certainly disrupt the financial planning industry, writes Todd C. Frankel for The Washington Post.
Though some say such services are “target-date funds with slicker marketing,” he writes, they could change everything. “Billions of dollars in fees are up for grabs.”
A Cerulli Associates study reports that auto-investing service, Betterment’s, assets tripled between January and October 2015, to $3 billion, according to a ThinkAdvisor.com story. “That 200 percent growth rate is piddling compared to what Cerulli Associates is projecting for the entire robo-advisor industry,” according to that article. “The research firm (has) projected a 2,500 percent jump in robo assets by 2020, to $489 billion.”
Such companies are expanding the services they offer, especially into the 401(k) space, reports Andrea Davis for Employee Benefit Adviser. “Financial Guard is just one of several so-called robo-advisors that have entered the 401(k) space in recent years,” she writes. “Others include Betterment for Business (launching in January), Blooom and Captain401. They all use computer-generated models, or algorithms, to get workers into better investments and they say they can do it more cheaply than managed account services offered by traditional record keepers.”
Such services are certain to be the subject of future debates and regulation. Many are currently registered as advisors with the SEC, but current laws simply don’t allow for their existence, argues SEC Commissioner Kara Stein, according to a different ThinkAdvisor story. “What does a fiduciary duty even look like or mean for a robo-advisor?” Stein said. “The idea of a robotic entity that automatically generates investment advice certainly bumps up against what we would traditionally think of as a fiduciary.”
Many financial planners believe they can’t be completely replaced by robo-advisors, Frankel writes. “There is so much you can’t do through a computer screen,” Frankel writes, quoting Frank Moore, chief investment officer at Vintage Financial Services in Ann Arbor, Michigan, who counseled clients through the Great Recession. “That’s not something you can program into an algorithm.”
So how can real advisors triumph? They can provide a voice of reason and advice by learning about the benefits and drawbacks of such services as they counsel employees, Davis writes. Advisors also need to improve the services they offer. “The human advisor needs to be even more human,” Frankel writes. “The rise of these automated services already has driven smaller portfolio-management firms to merge with firms that offer a wider range of wealth management services.”