Would you trust a robot with your money? You probably already do.
Fact is, if you have some money in a pension or even in the bank, somewhere, automated decisions are being taken on how to manage it.
Like the advent of driverless cars on our roads, the rise of robots to steer our finances seems unstoppable.
We are about to see the introduction of technology in Ireland which can directly help you plan your finances. It’s called robo-advice, because it doesn’t require human intervention to give financial advice.
It’s not all new. You’ll be used to an automated process when it comes to buying, say, your car insurance – even if for most of us that still winds up in a phone call to haggle the price.
It has taken the robots a little longer to catch up when it comes to investment and pensions advice. Soon, web-based applications for delivering this advice will be the norm.
Businesses like Betterment in the US, and Scalable Capital in the UK and Germany have blazed a trail in helping people build their investment and pensions online. Last month, Australia’s Ignition Wealth announced plans to do something similar in the Irish market. And it’s possible today to receive investment advice online in Ireland – we already do this at Moneycube.
How does it work?
All robo-advisors work in the same basic way. They take your answers to a series of questions, feed them into their algorithm, and produce an investment portfolio appropriate to your needs. Then they help you start your investment right away, via a debit card or a direct debit from your bank.
The cleverest ones make taking financial advice easy. They use on-screen avatars, text message-style interfaces, and real-time calculations to bring your pensions and investments to life. And making it easy means you’re more likely to invest your money.
Can the robot make me richer?
Robo-advice is good for your wealth for several reasons.
It’s no surprise that robo-advice can be delivered more cheaply, and faster, than face-to-face advice. Robots work through lunch.
In addition, most robo-advisers channel your money into low-cost exchange-traded funds which cost a fraction of some actively managed investment funds.
Robo-advice businesses are also generally very open about the fees they charge, and good at explaining how investing works. Most operate on a ‘pay as you go’ basis, charging a percentage of the money they manage for you. It’s possible to find fully advised portfolios with total fees of under 1% of your investment in some countries now.
On top of that, anyone can get a robo-advisor. Automating financial advice makes it possible for people who wouldn’t dream of making an appointment with a (real, live) advisor to obtain financial advice.
What’s most intriguing is the idea that robots can give better advice than humans a lot of the time. Robots remove emotion and bias from financial decision-making, and can access more data when forming their advice.
Their algorithms have been constructed by specialists, and every investor gets the benefit. Computers are consistent.
Please drive carefully
But computers have blind spots too.
Robo-advisors find it tough to take account of your wider personal situation. For example, they might know more about your salary than you do, but they won’t know if you’ve got a bonus coming. A robot won’t pick up the hint if you’re planning to have a baby.
It’s also been noted that robo-advisors have grown up in a time of generally buoyant markets. For some of them, their software has yet to be tested in a market downturn.
On the other hand, a good financial advisor will seek to understand not just your financial plans, but your tax situation, wider estate and life plans.
So robo-advisors can do a great job of driving down the cost of advice, and improving its consistency. But there are clear limits to their powers.
Human vs Robot?
As with driverless cars, it turns out most people want the ability to seize the controls for their finances if they need to.
The robo-advice industry seems to understand this. Betterment, the US pioneer, has recently been transforming itself by hiring real, live advisors to augment its digital advice service.
The versions of robo-advice that launch in Ireland look set to have a Qualified Financial Advisor close at hand.
So it seems likely that traditional financial firms and robo-advisors will meet in the middle. For customers, choice will increase. We’ll be able to choose when to use a robot, and when an experienced financial advisor needs to take a look. The customer is back where they belong: in the driving seat.