We are constantly striving to find the Holy Grail — be it a surefire method to grow our wealth, a process to ensure our self-fulfillment or a means to increase our longevity.
In the modern age, the newest Holy Grail is cutting-edge technology. And in finance, a fast growing number of investors are turning to robot investment advisors (robo-advisors”).
Both inside and outside of finance, the 20th century was profoundly impacted by the rapid and widespread rise of technology from the mainframe to the personal computer followed by the handheld device. These days, there is an app for everything, including your health, your happiness, and your portfolio.
However, in our rush to embrace the latest advancements, we have misconstrued the meaning of the term “artificial intelligence”, mistakenly conflating “artificial” with “objective” — an error well masked by our thirst for all things technology, coupled with shrewd, maniacal advertising. Nowhere is this more apparent than with robo-advisors in finance.
The Rise of Robo-Advisors
A robo-advisor is an online financial consultant that provides automated portfolio management without human involvement or interaction. Investment goals are communicated, money is transferred, and securities purchased — all in the realm of the Internet. There is no actual investment professional to sit down with you to discuss your retirement plans or how to fund your kid’s college education. Algorithms create asset allocations, and web-based risk tolerance questionnaires match each client to a portfolio that fits his or her profile.
Robo-advisors are currently one of the fastest growing segments of the wealth management industry. Fees for robo-advisors are substantially lower than those in the traditional human-based service model, and robo-advisors are sold as being more “intelligent” than their human competitors. But are robo-advisors actually more intelligent?
Measuring Man against Machine
What is concerning is this notion that robo-advisors possess greater intelligence than their human counterparts. An industry creates a new platform with technology at its core and assumptions are made — most importantly, the assumption that with technological advancement comes improvement. They tell us, “If you are searching for a better way, look to a robo-advisor.” But robo-advisors — as they are currently designed — provide little actual advantage for investors.
Robo-advisors do deliver a simple benefit for those seeking to cut their portfolio fees and attain a measure of control over their own investments. However, it is a mistake to tout robo-advisors as being smarter or more intelligent than human wealth managers.
This is the truth behind robo-advisors: the same, old investment advice and approach — modern portfolio theory — is being peddled, but packaged differently and marketed as being “better.”
Perhaps it is unfair to expect a novice investor to notice, but a seasoned professional with widespread experience in both financial markets and the decision-making process can see the myth of the supremacy of robo-advisors. The theories and investment approaches employed by robo-advisors are absolutely no different than those used by their human financial advisor counterparts, but our obsession with technology fools us into thinking robo-advisors are superior.
The Bottom Line
We live in a world where technological capabilities expand exponentially every day as we convert human-based products or services into their mechanical equivalents. And this is a positive trend; it is not what we are doing that is wrong, rather how we are doing it. It is not good enough to merely automate processes and services – doing so lacks an understanding of the actual benefits that technology can deliver.
Robo-advisors included, technology and automation are an opportunity to remove human emotion from a process, and thereby make it more efficient and effective. Humans are innately emotional, biased animals; albeit mostly behind the scenes, prejudice is present in everything we do — including decision making and investing. If we utilize technology to eradicate emotion and bias, it can serve as a vehicle that enables actual improvement and intelligence beyond what a human advisor, for example, can provide. Until then, be wary of “intelligent” robo-advisors. They are just as flawed and fallible as their human equivalents while lacking the ability to self-reflect to identify their shortcomings and harness their real potential.
If we truly desire to create a world where happiness abounds while suffering is eliminated, we first must recognize what causes our pain. It is not a lack of technology or automation, but rather an overabundance of emotion in everything we do, investing included. Robo-advisors are a manifestation of our flawed technological attempts toward improvement. They are different from human advisors, but not better. To be clear, it is not the presence of a person that is a problem, it is the presence of emotion —a fact that present-day robo-advisors have yet to grasp.(For more on robo-advisors, see: Comparing an Edward Jones Advisor to a Robo-advisor.)