Robo-Advisors: Better consultants than us? | by Gurleen Kaur

It’s a well-known fact now that Artificial Intelligence is becoming more and more indispensable with each passing day. Who thought that one day, to take even a crucial financial decision, we’ll be seeking the advice of an algorithmically designed robot? Yes, you read it right. Today we have “Robo-Advisors” that can help you in choosing between various investment options by providing extensively researched information.

Talking about the Fourth Industrial Revolution, the term was introduced by Klaus Schwab for the first time. It refers to the rapidly developing environment in which disruptive technologies such as robotics, Artificial Intelligence, Internet of Things (IoT) are taking over all the spheres of our lives. The invention of Robo-Advisors are a perfect example of Fourth Industrial Revolution, for it fuses the physical, digital and biological worlds, and thus has an impact on all disciplines, economies and industries.

But how do Robo-Advisors actually work?

Mechanism

First of all, the robo advisor gets to know you by asking you a set of questions. Some of the common questions include your age, the amount that you plan to invest, whether that amount is lump sum or monthly sum, your risk tolerance and so on. Then a portfolio is made on the basis of your responses. Finally, the robo advisor suggests you the best investment options at particular interest rates by scrutinizing historical data, past trends, future projections etc.

How and why are they good for us?

1. Unbiased advice

Irrespective of the investor’s wealth or the amount that he plans to invest, being automated investment platforms Robo-Advisors give absolutely unbiased and transparent advice. Moreover a human advisor might have restricted knowledge towards a specific asset class, whereas a robo advisor is product neutral.

2. Low cost Contrary to what it might seem, Robo-Advisors are much cheaper than traditional advisors. A flat fee of just 0.2%-0.5% of the client’s total account balance is charged annually by the Robo-Advisors as compared to a typical rate of 1-2% charged by human advisors. What might be looking as a small percentage right now can ultimately lead you saving a very high absolute amount when compounded over n years.

3. Rebalancing It has been seen that when an investment portfolio is rebalanced, back to its preferred asset allocation, it improves returns and volatility is also reduced. This can be done on your own, but when automated Robo-Advisors come into play, this tedious task seems like a cake walk. But a very logical question that might arise in your mind is that, ‘Is this much invasion always good?’ To get a clearer picture, let’s look at the harms of using these bots.

Cons of Robo-advisors

1. Limited accessibility

This proves to be one of the major problems faced by the clients of robo-advisors. Most of these bots are not accessible during weekends. Or even if they are, they have limited number of phone hours. They offer services only through email, chat box and text contact.

2. Frequent rebalancing might prove to be bad Rebalancing by robo-advisors is either done daily, or monthly or even on a quarterly basis. Such frequent rebalancing often leads to a number of transactions and exorbitant fees. Moreover, sales in a taxable account can also trigger taxes on capital gains, according to Jeff Brown, a journalist who works in the financial domain.

3. Problems during Tax-loss harvesting Tax loss harvesting is a practice in which a security is sold at a loss to offset taxes on both gains and income. But this can lead to lots of additional paperwork. Moreover, your Robo-Advisor must be aware of the ‘wash rule’ which dismisses any loss that occurs when a similar security is repurchased within 30 days. But how would you know whether the pros weigh more or the cons? What seems like the best option is getting the best of both worlds- artificial as well as humans. But is that possible? The answer is: YES. And if you may ask how? The answer is: through Hybrid Robo-Advisors.

Hybrid Robo-Advisors

Amalgamation of Robo-Advisors and human advisors results in Hybrid Robo-Advisors. Unlike any Robo-Advisor, the hybrids suggest low-cost investment options based on extensive research in accordance with your risk tolerance and many other factors. In addition to that, hybrid advisors marry the efficiency of a computerized investment manager with the comfort of a human financial advisor to answer your queries related to money matters. To make the concept clearer, following are some of the examples of existing hybrid Robo-Advisors.

1. WealthSimple Here, the financial advisors are accessible by all clients. There are no minimum limits set for investment and the first $5000 is managed free of cost. The basic platform has a costing of 0.5% and includes portfolio selection, rebalancing and tax-loss harvesting. Investors with more than $100,000 get the benefit of a discounted fee of 0.4% as well as additional tax efficiency and access to VIP airport lounges. 2. Vanguard Personal Advisor Services The clients owning $50000-$500000 in assets are allotted a team of advisors. Larger the balances, greater are the price reductions. Portfolio rebalancing is done on a quarterly basis. Tax-loss harvesting instead of being automatic, is determined by your financial advisor. 3. Ellevest Premium Designed for women, Ellevest was founded to overcome the problem of women being underserved in the investing industry. More conservative planning simulations are used by Ellevest than other Robo-Advisors. Taxes, fees and inflation are taken into consideration while preparing forecasts.

• Ellevest Premium

The users get the benefit of availing the services of certified financial planners and certified career coaches. No minimum limits are set for investments and the fee is 0.5%.

• Ellevest Digital

No minimum limits are set for investments and fees is 0.25%

4. Schwab Intelligent Advisory A fully automated robo portfolio is combined with a digital financial plan and unlimited access to human advisors. This brokerage firm claims to be the first one to offer automated investing. It consists of two robo advisory levels:

• Schwab Intelligent Portfolios

It is free, has a minimum investment set for $5000, but the access to avail the services provided by certified financial planners is not given.

• Schwab Intelligent Advisory

It has a fee of 0.28% and a minimum investment is set at $25000.

Conclusion

In a nutshell, Robo-Advisors are the newest way to invest. They prove to be extremely useful for young investors who want to invest judiciously but lack the information to do so. But all the things have their pluses and minuses attached to them; so why will Robo-Advisors be any different? People take time to get comfortable when a human being is replaced with a machine, and obstacles do come in the way. But again, thanks to technology, through introduction of Hybrid Robo-Advisors, we have found a way to speed up the process of getting used to taking advice from bots along with keeping the human touch intact. One thing is now proved, that technology acts as a savior for itself; any hindrance in a technological invention can be overcome with yet another technological invention!