AI And Robo Advisors

Join The Discussion | Ai4 Finance 2019

The concept behind robo advisors is sound: bridge the gap between do-it-yourself investing and costly financial advisors. The result? A population making better financial decisions.

Over the past few years robo-advisors have grown from a rather niche service to an industry that currently manages over $980 billion dollars across ~45 million users as of February 2019 according to one report. That number is expected to keep growing to over $2.5 trillion by 2023.

The widespread use of these robotic advisors, many of which now leverage machine learning technology, is controversial. Many [human] financial planners argue that while niche applications of these products do hold great value, for many customers, particularly the wealthy, these “cookie cutter” investment services cannot match the yields of a traditional financial planner.

On top of that, robo advisors using AI are often operating a “black box” platform where specific investment decisions cannot be explained to customers. When losses occur, this becomes particularly problematic.

Despite some initial shortcomings and concerns, the industry is still strongly trending in the direction of robo-advisors. In the future, explainer-AI systems hope to alleviate the “black box” issue and the countries leading services like Wealthfront, Betterment and Vanguard hope to add sophistication to their models to move beyond the basic cookie-cutter approach.

Let’s explore the cost and performance differences of robo vs. human advisors:

Cost:  Typical robo-advisors charge fees from 0.25% to 0.89% of the total amount of money managed. Most robos have zero minimums, so investors can put $500 into a robo advisor if they’d like. Unsurprisingly, the reason behind no minimums is because the variable cost of adding an additional “client” is effectively $0 to the robo advisor. At the other end of the spectrum, personal financial advisors often charge a flat annual fee plus a percentage of money managed, with the median fee being 1%. Beyond the higher costs, many human advisors have minimum investment amounts.

Performance: Looking at two-year returns (2016-2017) based on a 60% equities / 40% fixed-income portfolio for a handful of robos, it’s clear that robo advisors are placing money in the right places.

  • Acorns: 7.53%
  • Betterment: 10.24%
  • Personal Capital: 9.64%
  • Schwab: 10.98%
  • SigFig: 10.71%
  • Vanguard: 9.59%
  • WiseBanyan: 9.98%

The question to ask when it comes to robo vs. human is: can the robo advisor plan for my long-term financial goals? Just allocating a client’s money is commoditized, but tweaking your portfolio over time as the market changes in order to keep your 10, 20, or 30 year goal in mind is another story. Some will argue that such long-term thinking is unique to human advisors, but as technology marches on, robos are becoming increasingly capable of considering a client’s long-term interests into today’s investment decisions.

Join the AI + Robo Advisor discussion at Ai4 Finance!