INVESTMENT ROBO-ADVISOR SYSTEM

GET 302/602 Final Group Paper

Group Members: Chen Qianqian; Cockrell Thaney Elyse; Conway Karim Gregory; Gupta Sanya Premkumar; Khan Nabil Asad;

Rand Tyler Philip; Sachdev Divya

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Table of Contents Introduction .................................................................................................................................................. 2

History and Evolution ................................................................................................................................... 2

Technology and its role in achieving the business goals ............................................................................ 3

Financial advisors ..................................................................................................................................... 3

Robo Investment Advisors ....................................................................................................................... 4

Technology behind robo-investors .......................................................................................................... 4

Business goals ........................................................................................................................................... 6

Security of Robo-Advisors ............................................................................................................................ 7

Current cybersecurity in Financial Service Industry ................................................................................ 7

Cybersecurity for robo-advisors .............................................................................................................. 8

Regulations of Robo Advisory Firms ............................................................................................................ 9

Robo Advisors across the globe ................................................................................................................. 11

Trends in robo advisor industry ................................................................................................................. 12

Success Formula of Robo Advisors ........................................................................................................ 14

Critical Success Factors for Robo- Advisors ........................................................................................... 15

Future of Robo Advisors ......................................................................................................................... 16

Advantages of using Robo advisors ........................................................................................................... 16

Conclusion .................................................................................................................................................. 17

References .................................................................................................................................................. 18

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Introduction

Financial advisors have always been considered as one of the prime assets for wealth management firms as they possess the skills and knowledge to understand the financial objectives of the clients. They have the ability to figure out the intricacies of the financial market and make recommendations based on the client’s market value, financial position and their ability to deal with risks. Recently, organizations have been making huge investments in an attempt to automate the services delivered by financial advisors which has led to the rise of robo advisor systems.

Robo-advisors are technology based financial advisors that use minimal or negligible human interventions. These financial advisors are automated systems that use algorithms and technology to give people advice. Typically, robo-advisors provide insights about portfolio management and use the information provided by you to make decisions. When you join any robo-advisor company you are asked a series of questions that will be used to determine anything from portfolio rebalancing to tax loss harvesting to dividend reinvestment. The technology used by robo-advisors mimics the software used by human advisors. The biggest difference between Robo-Advisors and traditional advisors is the human touch. Technology based advisors clearly do not know you personally and can’t take that into consideration when giving advice. Overall, a robo-advisor is a form of online wealth management tool without human interaction.

Robo-Advisor’s main audience are the people with low account minimums and the technology aspect attracts a younger crowd. Since younger people are typically more trusting and comfortable with technology there is no fear in trusting a Robo-Advisor over a traditional human advisor. The main benefit of Robo-Advisors is that people who need advice can now get it at a reasonable price.

History and Evolution

Robo-advisors were first founded in 2008 but the use of automated advice became widespread about 10 years ago. The advent of Robo-Advisors were attributed to the financial crisis. Initially they were going to be used to “rebalance investor assets within target-date funds, and give investors a modern, online interface.” (FutureAdvisor, 2008). This idea of eliminating the middle man and direct access was also growing quickly. Online wealth management was prevalent since 1990’s and the use of software for giving advice was developing but they did not feel the need to eliminate the middleman.

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In the 1990’s customers were often uncomfortable with technology and were not ready to share their personal information online. During this time, wealth management software was only sold to traditional advisors that were working and charging fees for their services. Over time there was an increase in online wealth tools and services and the start of technology in the financial industry skyrocketed. Places such as Silicon Valley gave the industry proof that technology was making an impact and that customer habits had changed.

Robo-advisors are a new type of advisor that increase the automated services available to the customers. The automation allows services and companies to become more accessible and scalable. It will not be long until Robo-Advisors will have more services to offer such as cash-flow management, tax planning or even college savings.

Technology and its role in achieving the business goals

Financial advisors According to Stephen Horan, Head of private wealth at CFA Institute, Financial Advisors assess an individual’s monetary holdings and assets and helps them achieve their financial goals. They are usually employed by investment firms, banks or insurance companies. They would develop a plan or schedule a meeting with their clients and help them achieve their financial goals by selecting the best combination of insurance plans, stocks and mutual funds. Advisors with special license could also sell their own financial products to their clients. This process was generally hectic and time consuming. Moreover, the advisor essentially follows his academic work with his understanding of the market trends to help his clients which is highly unpredictable and may or may not work in clients’ favor. Often when any clients’ investment go wrong, it would turn very sour between the advisor and clients and moreover there would be lot of emotional baggage accompanied with the loss. Furthermore, there is always a chance of employees who might try to manipulate clients for personal gains.

However, the traditional system had the benefit of having a personal contact with the advisor where they can have a verbal and one-to-one communication with them which gave them an assurance for their investment.

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Robo Investment Advisors With advancements in information technology, there is a huge shift in the way people manage their money (Stein, betterment.com). Better computing and information flows has led to development of backbend brokerage products such as target-date funds and ETFs.

A robo-advisor is a result of this advancement. It is a technology assisted online wealth management portal that provides financial advice to its clients. They basically work on the sophisticated management and investment algorithms that are coded into the system that delivers lower cost investing platforms to the public. There are approximately 25 robo-advisors available in the market today such as Betterment.com, Wealthfront, FutureAdvisor, SigFig, Personal Capital and many more. Some of them are completely automated and others have a slight human intervention.

Robo-investment advisors is nothing but a website like any other which makes use of some highly complex and sophisticated algorithms. When a potential client logs on this website, the robo-advisors takes them through a series of questions to understand their goals and risk tolerance capacity. The advisor takes in this information and runs a calculator through them and accordingly, they build a diversified portfolio using passive investments like ETFs and index funds.

Technology behind robo-investors Robo-Investors could attain such a huge popularity because of the creation of index-tracking ETFs (exchange-traded funds) and cloud computing. ETFs allows an individual to own all the stocks that forms a major index in their brokerage account. This is far more efficient than equivalent index fund because it allows to put together low-cost, liquid portfolios and improve tax-efficiency. It can generate an incremental after-tax return of 2.46% (blog.wealthfront.com). On the other hand, cloud-computing allows the engineers to make and test products in cost and time-efficient ways. The result is low-cost, optimized investment platform that gives user a seamless user experience.

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Robo-Investment advisors are websites that requires a potential client to log in the website. The website then links the clients’ account to their checking account in a few minutes. Then the client is taken through a brief questionnaire to understand their risk tolerance level. This questionnaire essentially consists of questions like client’s age, salary, liquid assets, and clients’ priorities. It also has some analytical questions that aims to understand the clients’ reaction in critical situations.

For example, one of the question that is asked in wealthfront.com is, in this volatile global market, what would be the clients’ reaction if he loses 10% of his entire investment portfolio (wealthfront.com). And the options that are typically provided are: 1) sell all the investments 2) sell part of the investment 3) keep all the investments 4) buy more stocks. Based on such questions, the clients are given risk tolerance points which can be adjusted by the client. And then, the clients’ capital is divided between ETFs in stocks and Treasury Bonds. These

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ETFs are passively managed by the online advisors who track a variety of indexes based on a coded intelligent algorithms (Furman, 2011).

Wealthfront.com

The above figure is an illustration of how the Wealthfront robo advisor distributes the investment among different stocks and bonds. The risk tolerance of the client is calculated to be 8.0 and the liquid assets were assumed to be $40,000. Based on these details and other answers, the client should invest 35% in US Stocks, 22% in foreign stocks, so on and so forth.

Business goals Robo-Investment Advisors are much more than just an online service that makes it convenient for investors to manage their online investments. This new-age technology gives much more than an online platform (betterment.com)

x It automates the deposits, thus enabling the client to buy stocks and bonds on a regular basis. This makes the investment steady and prevents the clients from making impulsive decisions. Hence, better investment portfolios, better returns and better growth

x It helps in managing the risk since the whole concept works on clients’ risk-tolerance level. They also mitigate risk by diversifying the investments and maintaining an optimal asset.

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x It uses graphs, pictures which helps them leverage better reporting solutions, thus giving the clients a better explanation of the activity and the returns.

x Also a potential client can visit the website as many number of times to make a final decision of the choice of investment advisors. Sitting at one location, user gets a variety of choices among investment advisors. This saves their time and adds to their convenience.

x Lastly, robo-advisors are a cost-effective investment advisors. They charge minimal amount and general principle is more the investment, less is the percentage of the investment that is charged. This is convenient to the client as he is getting cheaper services and also for the advisors as they make great client foundation and earn good commission.

Security of Robo-Advisors

Cybersecurity has been regarded as a hot topic when the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) release their reports related on cybersecurity issues. The online activities involved with financial investments are easily targeted by cyber criminals. How to protect clients’ information from technology breaches is a key factor for attracting and retaining customers.

Instead of collaborating with a real human advisor, robo-advisors offer investment advice based on clients’ digital portfolios. It is a program that helps clients manage their assets based on algorithms, personalized by clients’ recoded preference. No human interaction is involved during the whole process from making investments to researching options, which makes robo-advisor a relatively low-cost service. But at the same time, it is more exposed to online threats.

Current cybersecurity in Financial Service Industry Despite that North American Securities Administrators Association stated that there were only 4% of small to mid-sized RIA firms have experienced a cybersecurity attack, (Leonhardt, 2014) Neal O’Farrell pointed out that cybersecurity breaches are not rare, but just not detected. According to his study, there are still 37% firms did not take risk assessments to identify cybersecurity threats, vulnerabilities and potential consequences at all. (Leonhardt, 2014)

On February 3rd, both SEC and FINRA released their reports about cybersecurity in registered broker-dealers and investment advisers. According to their study, there are two notable

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weaknesses in cybersecurity protection. Firstly, there are potential risks in terms of third party management. A lot of broker-dealer and investment advisor firms engage, or collaborate with third-party vendors, and allow these third-parties access to confidential information. What is worse, there are 16% of investigated broker-dealer firms, and 68% of investigated investment adviser firms, that did not require cybersecurity risk assessments of third-parties with access to their networks. (Zeoli, 2015) In this case, hackers can easily attack broker-dealer firms, or investment adviser firms through the weak third-parties.

Secondly, it depends on whether a firm maintains insurance for cybersecurity incidents. According to the OCIE Report, there are 58% of broker-dealers, and only 21% of investment advisors provide insurance for cybersecurity incidents. In fact, there are only a very small part of the investigated broker-dealers and investment advisors having completed policies and procedures about how to deal with the loss caused by cyber breaches.

Generally, the cybersecurity in financial institutions are not as strong as we thought. As financial advisor services are becoming more and more digitalized and mobilized, cybersecurity would be a far important issue to be considered since any benefits would mean nothing if the clients’ information are leaked.

Cybersecurity for robo-advisors As a highly automated and digitalized investment program, robo-advisors can have a real advantage only after it experienced a cyber-security audit. What is the cyber security of robo-advisors? And how to evaluate whether the robo-advisors is safe?

Here are two famous robo-advisors in the market: Bettermenti and Wealthfrontii. We compare the strength of cybersecurity from security and privacy, fraud detection, and account protection perspectives:

Betterment Wealthfront

Security & Privacy

• Use the strongest browser encryption available, store the entire information on servers in a safe office, and implement orderly methods and systems for securing and putting away information

• Protect the protection of clients' data and not to share the data with

Users assets are held in an account at a third-party custodian named Apex Clearing. Wealthfront only has the right to issue trading instructions against your account. It cannot access users’ cash other than to receive its monthly advisory fee.

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any third party without users’ permission

Fraud Protection

Being committed to protecting users’ account from unauthorized activity.

• Report the unauthorized activity in users’ account immediately.

• Work to recover any loss that results from unauthorized use of Betterment account.

No specific fraud protection, but it states that there is no Proprietary Trading.

Account Protection

Betterment is a member of SIPC, which protects Betterment’s accounts up to $500,000 (including $250,000 for claims for cash). Even if something happens to Betterment, you will still get your securities back.

Because of the limits on SIPC, Apex Clearing has secured excess SIPC insurance that provides an additional $150 million of coverage across all its clients.

Combined with the potential risks proposed by OCIE and FINRA, Wealthfront may be dangerous: it works with a third party – Apex Clearing. In the reasons why Wealthfront use Apex Clearing Corporation to custody and clear client assets, it neither mentioned risk assessment about identifying cybersecurity; Secondly, it only states that there is no proprietary trading. However, it does not specifically figure out how to deal with the loss caused by unauthorized activities. Despite that it does not necessarily mean that Betterment is better than Wealthfront, clients should learn more about cybersecurity policies and practices when they decide to use a robo-advisor.

Regulations of Robo Advisory Firms

The regulatory governing body of Robo-Advisors are the Stocks and Exchange Committee (SEC). This means that Robo-Advisors are regulated by the guidelines and policies laid out by the federal government. Robo-Advisors utilize algorithms and model portfolios to allocate investments for their clients. (Stalter 2014) The software that is utilized is similar to that of a traditional human advisor, but they only specify in portfolio management which creates less personal interaction as

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they are not dealing with more personal wealth management systems such as taxes or retirement planning.

Robo-Advisors based their services off of the client’s objectives and what they want to achieve out of their transactions. One of the services of the Robo-Advisors is to let their clients understand the risk tolerance for investing with their services. There are certain restrictions and limitations that the Robo-Advisors assert on their clients as restrictions are stated by the SEC guidelines.

Even though the Robo-Advisor is a more user-friendly system to use, it may lose some of its stability because it does not provide its clients with more detailed and equipped information about transactions. This is more common with traditional advisory firms that are specialized in giving detailed explanations for various transactions. Robo-Advisor loses the personal interaction that a human advisor could provide and more a run-down explanation for its clients. Robo-Advisor provides very clear cut responses to its clients so that may be favorable to some and not to others.

Some of the services that Robo-Advisor provides are rebalancing accounts, dividend reinvestments, and even tax-loss harvesting. As mentioned as before, even though Robo-Advisors cannot give personal and more thorough details about transactions its user-friendliness is highly rated.

If we look at the two leading major companies for Robo-Advisors, Betterment and Wealthfront, there are some similarities and differences in how they offer their services to their clients. These differences are based off of some critical criteria such as cost, custody, account types, investments, taxes, and stocks. Different Robo-Advisor firms have different costs for their services. For example, Betterment allows their clients to invest however much they want to invest in stocks and bonds. There is also no charge with Betterment to create an account. The fees that Betterment charges are for dependent on the account balance. (Berger 2015) Wealthfront is very similar in the services they offer as Betterment but charge their clients $5000 to create an account. Also, the management fees that are associated with the account can also be charged. Wealthfront also boosts itself in claiming their services are an “Automated Investment Service for everyone.” (Stalter 2014)

In terms of custody, some services require that money transfers go through their own firm whereas others go through other well-known brokerages. Also, account types may differ depending on the firm that one chooses. Some firms offer taxable accounts and IRA retirement accounts, but some do not account for those who may be self-employed. Investment options are another difference that separate firms in terms of services. Certain firms limit their investors to invest to the ETF’s but other firms are more flexible in terms of investing. Tax features are also included in some firms such as tax loss harvesting but not all firms include the special feature.

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Lastly, some firms allow the investor to invest in individual stocks, but the majority of firms do not allow a single-stock investment. (Berger 2015)

Robo Advisors across the globe

Robo-Advisors are a relatively new kind of company, and because of this, coupled with their need for cutting-edge technology and upfront capital investment, they are found primarily in first world countries, specifically the United States. There are under 50 total Robo-Advisors firms worldwide but that number is increasing steadily as the technology matures and consumer awareness grows, though they likely won’t be found in third world countries for some years.

The technology for using Robo-Advisor across national borders exists and is utilized in some places, but tax regulations are keeping it from being fully adopted by Robo-Advisor firms. Because of the United States's complex tax regulations, U.S. citizens are forced to invest with only domestic Robo-Advisor firms. The largest two U.S. based Robo-Advisor companies, Wealthfront and Betterment, say on their FAQ pages that they can only accept U.S. citizens with valid social security numbers, U.S. bank accounts, and U.S. mailing addresses (https://pages.wealthfront.com/faq/ and http://support.betterment.com/). Other countries have slightly more relaxed regulations; they only require a bank account in the region and not having any tax liabilities in the United States, and not being a United States citizen. An example is Money on Toast, a UK based Robo-Advisor firm which can accept any customer with a UK bank account and a residence in the UK, but not anyone from the U.S. due to tax regulations (https://www.moneyontoast.com/faqs/). The difference is this allows a person from outside the UK to use Money on Toast as long as they have a UK bank account and residence. For people with dual citizenship, one being a United States citizenship and filing taxes in the U.S. is a deal breaker for using a Robo-Advisor from another country.

Within a particular Robo-Advisor firm, portfolios' contents aren't limited by geographic boundaries. Companies will buy stocks, bonds, and all other assets on various other countries' markets to create the ideal portfolios for their clients, based on what the clients have selected. This is all made easily possible with the various exchanges being connected over the internet, allowing investors to place orders with exchanges worldwide. While portfolios can be made up of assets from all over the globe, they usually come from the local country or group of countries to avoid currency exchange loss. Unless otherwise specified a portfolio can be assumed to include international assets in some moderation.

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Trends in robo advisor industry

For any technology to establish itself in the market, they need to have hyper growth opportunity backed up by big numbers and great margins. According to Michael Kitces, one of the famous American financial planners, recently commented that “32 million mass affluent Americans have assets in the range of $100,000 to $1 million, and of these only 20% have an advisor. Future Advisor, another major robo advisor firm has 80% of clients who never had an advisor” (Kitces, 2015). As of December 2014, the total assets under management for the top three robo advisory firms, Wealthfront, Betterment and FutureAdvisor combined was more than $14 billion (SEC ADV filings, Crunchbase, 2014). In fact, Wealthfront alone is soon going to cross the $1.5 billion mark. These numbers clearly depicts that the probability of robo advisors dominating the market is quite high. Through robo-advisors, the investment management firms will be able to successfully capture a new segment of the market industry, thus providing them new avenues for generating profits.

In the business world which is highly competitive, with onset of any new technology, there are competitors ready to offer similar services at a relatively lower rate or with better quality. This aspect of the business sector is beneficial for customers as they get the opportunity to choose from multitude of options. Currently, there are many financial advisory firms proposing similar services for the same set of audience; namely Wealthfront, Betterment, Learnvest, Personal Capital, Jemstep, SigFig, MarketRiders, Covestor etc.

There have been a number of reasons attributed to the significant increase in the revenues for robo-advisory firms. Firstly, it has been observed that there is a strong correlation between digital interactions and revenue. Forrester Research in 2012 found that revenues were largely driven with frequent advisor interactions. Client believe that social network interaction are the most powerful form of connections, trailed by online communication (text and chat), and then followed by advisor company’s website. In the current era, US adults spend majority of their time performing activities online. Moreover, a survey by North American Techno graphics determined that in 2010, only 22% of the investors were in agreement with the statement “clients feel online advice is just as good as what they can get from a traditional advisor” (Doyle, 2013). This percentage increased to 44% when the same survey was conducted in 2014.

Secondly, robo advisors can operate more economically as they use cloud rather than mainframe. For example, Wealthfront’s wealth manager receives the market data from Bloomberg, while Apex is used for clearing and Vanguard is used for ETF’s. For the conventional financial advisors, the annual fees for managing mutual funds is 1.5%, on the other hand robo-advisory firms like Wealthfront only charge 0.25% (Doyle, 2013). And recently Charles Schwab has entered the robo

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advisory market and is ready to offer the service for free. Charles Schwab is attempting to expand and differentiate returns through smart beta exchange traded funds.

Another significant trend that has been observed is the convergence of human and robo-advisors. We can expect that robo-advisors would basically depict the prospects human advisors managing customer’s portfolio. Besides, several human advisors are using technology to govern their businesses like a "robo-advisors”. Fidelity Institutional Wealth Services has embraced the robo advisor trend by partnering with Betterment. The move has been really bene ficial for both as the registered investment advisors would be able to work on Betterment’s platform and provide services to their existing clients as well as potentially attract new clients. Jon Stein, CEO and cofounder of Betterment commented “Marrying technology with advisor helps to develop client relationships, recommend solution for growing their business, and attract prospective clients along with focusing on high profit sectors with highest margin activities”. (Kane, 2014).

These robo advisory firms are clearly demonstrating the fact that the whole process of creating and formulating a strategic portfolio can be executed without a huge investment. 2009-2014 was considered an era where technology-driven portfolios were transformed and index funds were introduced in the market which affected the stock traders who had been trading in the market for the last 40 years. Conspicuously, the advent of index funds did not replace the human advisors, instead forced these advisors to revive and evolve their value propositions in order to keep up with the global technological breakthroughs.

The robo advisor market also represents a new opportunity for specifically ETF providers such as Vanguard, which is highly focused on dealing with low expense ratios (Ullal, First Bridge Data). Vanguard, one of the largest mutual fund provider across the globe and the third largest ETF provider in the US has presented plans of entering the robo advisory industry with the name ‘Personal Advisor Services’ Recently, a Vanguard representative commented that they intend to use robo advisory services as means of evolving the planning and advice services based on what they have learnt in the last three decades.

The financial experts in the industry believe that ETF providers would be gaining maximum through strong bonding with robo advisors. Majority of the robo advisor systems works on the concept of brokerage and their primary goal is to focus on low cost indices in order to have best possible investment strategy model. The robo advisor segment has a lot to offer to the specialized ETF providers as they typically belong to the low cost indexes advisor group.

Robo advisors are facilitating the adoption of latest technological trends. There is a high possibility of robo advisors integrating technology at a rapid pace in areas such as implementation of mobile applications and employing artificial intelligence to establish strong client communication that would enable the wealth managers to respond fast. The robo advisory

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websites need to take utmost consideration of not over complicating their websites for the first time visitors.

Success Formula of Robo Advisors

For venture capitalists, the success largely depends on the Return on Investments (ROI). There has been an exponential growth in terms of revenue for robo advisory firms in the last 3 years owing to the favorable market conditions (Bull market). The above table depicts that, within the next decade, Betterment needs to generate $56.5 billion, Wealthfront $82.8 needs billion and Personal Capital needs $18.9 billion (Personal Capital has a relatively higher fee structure). Venture capitalists only have a limited ownership of these firms, and in order to get the returns as expected, these numbers need to greater than projected. Considering the pace at which these firms are generating revenue, these numbers are not impossible and if exponential growth persists, these organizations would be able to reach their target values. Combined, the three aforementioned robo-advisors would be tentatively 50% greater than whole PIMCO mutual fund organization has gathered over its total existence.

Wealth management firms can leverage their services in the robo advisor market through developing effective strategies. A number of factors should be kept in mind while developing such a strategy:

1. Research: The organization needs to understand the philosophy behind the robo advisor trend as well as the target audience. For example, Wealthfront focuses on low cost investing in market cap weighted ETFs followed by tax loss harvesting.

2. Engage with the platform: The products should be created in such a manner that they seamlessly fit in the way users want it. They should be a good fit for the portfolio construction approach and workflow of the platform.

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3. Assess technology: The organizations need to be proficient in terms of resources and expertise to build the required technology.

4. Discuss business terms: The products can be made more available to the users by offering lucrative incentives. The organizations can collaborate with technical product providers.

5. Integration: The users should have access to timely and accurate data which is feasible by pursuing integration.

Critical Success Factors for Robo- Advisors Traditionally clients meet up with financial advisors who consult them on their finances but now individuals are starting to utilize robo advisors. Robo advisory will continue to grow in the near future as long as they continue to hold on to the key factors that made them successful in the financial market. Robo advisors came into the picture in 2008 after the financial market crashed. They were installed to stabilize the market and help with economic recovery. During this time many individuals who wanted to invest their money were skeptical to use such automated services.

To combat this uncertainty Robo advising companies like Wealthfront and Betterment decided to reach out to every mainstream investors irrespective of their age or status by giving them access to a service that was once reserved for high-net-worth individuals. This strategy allows them to appeal to a large group of individuals, as compared to traditional advisors who mainly aim their products at a select group of people. “Typical wealth management services in major financial institutions require minimum investable assets of a million dollars or more.”iii

Robo advisors contest tradition strategies by enticing the everyday person, the individuals who does not have one million dollars lying around to invest. The median U.S. household income is about $53,000.iv Making it difficult for individuals to meet this criteria. Robo advisor companies have noticed this and have attract not only millennials but older generations like the baby boomers too. Millennials like the fact that robo advisors eliminates face to face interactions with human advisors. Millennials are accustom to using technology and more willing to try robo advising platforms. Older generations also like that these companies use the same algorithms that traditional financial advisors use. Being attractive to many generations is a major success of robo advisors.

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Future of Robo Advisors A huge amount of data is generated regularly which needs to be processed and analyzed. With technological advancements resulting in cheaper, accurate and faster systems; there is an increased dependency on smart machines to process all of this data.v Throughout the course of history we have seen new technologies change our society. Mankind has always integrated new machinery to solve problems faster and eliminate human error. Companies have noticed this and have started to change their business strategies in order to accommodate for this ongoing trend. Even in the times of the Industrial Revolution, companies used new technologies that eventually displaced many manual jobs. However it also created a demand for people with new skills, people that would be needed to manage these new technologies.

This concept holds true for robo advisors in the financial advisory. Smart robo-investing machines will not replace traditional advisors but simply create demand for new skillsets for employees in this workforce.vi In the near future I believe that robo advisors and traditional advisors will converge for two main reasons. First is the fact that robo advisors have an online experience. Being able to monitor your own investment portfolio at home from a computer is a major accomplishment that robo advisors offer. Because of the onset of robo advisors, the future generation is sure to choose robo advisors over traditional human advisors. To overcome this, the traditional advisory firms need to catch up on their services and technology employed in order to compete with robo advisors.

This leads into the second idea of why robo advisors and traditional advisors will unite. Since young adults are just young adults they do not have the capital to invest in traditional advising. “However as they start to grow older and need to manage 7-figure portfolios they will seek more professional help. Robo advisors understand this and will be forced to add a human advice component to keep assets from fleeing.”vii That being said these smart robo-investing machines will not replace traditional advisors. Robo advisors manage assets worth about fourteen billion dollars in total whereas traditional financial advisors oversee about five trillion dollars in assets. As they continue to enforce the features that make them successful they will continue to grow.

Advantages of using Robo advisors

Keeping all the above points in consideration, following are the advantages of robo advisors:

1. Low fees: In comparison to the conventional financial advisors, they charge lower fees. 2. Low minimums: The investors who are starting new can easily capitalize through

investing in the robo advisory firms.

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3. Index-fund based buy & hold portfolios: Low cost index funds such as ETF’s are available to the buyers. (Vanguard, iShares, Schwab, etc.)

4. Asset allocation Models: Models can be built and risk can be assigned by just answering a few basic questions such as age, income, size of portfolio, etc.

5. Simple online reporting: The robo advisors can provide the fundamental service of performance reporting and transactions as well as provide details of the position in the financial market.

6. Portfolio rebalancing: A few robo advisory companies are specializing in portfolio rebalancing to generate the best possible results for the client.

7. Tax-loss harvesting: The robo advisors can help maximize returns through tax-loss harvesting.

8. Live online customer service: The users can easily contact the customer service in case if they need any kind of support while working on a particular robo advisory website.

9. Basic goal-based planning: They are also capable of displaying the amount of money that can be saved and that should be invested for reaching a particular goal.

Conclusion

In summary, we can say that robo-advisors handle virtually every aspect of investing. Once the money is transferred to the account and various investing priorities are filled out by the client, the service handles everything from rebalancing the investment portfolio to dividend investment to tax savings. There have been quite a few robo advisory firms in the market and many more are coming up with the coming years. The technology used to render this technology is rapidly evolving with each passing day and becoming better with more complex algorithm. However, since this concept of artificial intelligence is moderately new, the regulations and security considerations are still in nascent stages. The SEC, OCIE and FINRA are working together tirelessly to make robo advisors more secure and regulated in terms of cybersecurity and evaluation of risk tolerance levels of the clients.

Robo investment advisors have made financing management services more accessible making it more profitable for the firms and less expensive for the clients. Moreover, the technology requires less investment as compared to the traditional investment advisors. In the future, we expect that the traditional and robo advisors will unite to give advantages of both and give a new dimension to the investment management techniques.

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References

1. Berger, Rob. "7 Robo Advisors That Make Investing Effortless." Forbes. Forbes Magazine, 5 Feb. 2015. Web. 1 May 2015. Retrieved from http://www.forbes.com/sites/robertberger/2015/02/05/7-robo-advisors-that-make-investing-effortless/

2. Stalter, Katie. "Financial Advisors vs. Robo-Advisors: Which Is Right for You?" US News & Worlds Report. N.p., 27 Oct. 2014. Web. 28 Apr. 2015. Retrieved from http://investorjunkie.com/41363/robo-advisors-vs-financial-advisors/

3. Needleman, S (Nov 2008). The Wall Street Journal: Working as a Financial Advisor. Retrieved from http://www.wsj.com/articles/SB122697484585736147

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