Investors are constantly bombarded with new information. Sound bites and breaking news headlines dominate their smart phones, their computers and their television screens. All this information is released in a way that is designed to catch the attention of investors and inform them about what is happening in the markets. Up-to-the-minute announcements grab their attention. But advancements in information technology are also helping investors to gather information faster, making it easier for them to invest.

Individual investors have more options to choose from today, such as low-cost index funds, low-cost trading opportunities, and a plethora of mutual funds and exchange-traded funds that have all been a boon to the investing public. The speed at which news and information can now reach investors, as well as the speed at which trades can be completed is also giving investors more access to opportunities than they have ever had before. This has all led to improved investment vehicles. But while all this fast-paced access to information and trading is happening, some in the financial advisory industry are questioning whether it's really helping investors to make better decisions and improve their investment outlooks. (For related reading, see: Financial Advisors Are Feeling Cyber-insecure.)

The goal of most investors is to be able to make smart investment decisions in a cost effective and efficient way that doesn’t cause them too much stress. Investors also want to feel secure that their holdings are diversified enough to lower their risk, while also bringing them decent returns. Registered investment advisors as well as money management firms have done much in the way of educating investors over the last decade about how they can best achieve their goals. But their efforts have not always been successful. That’s why some investment advisors are looking to advances in technology to help investors get on track. (For related reading, see: Six Things Bad Financial Advisors Do.)

One of those advances is the increased use of automation technology. These tools can help investors to achieve the outcomes they are seeking in record speed, while helping to keep their emotions in check during the process. Betterment, which now has close to $1 billion in assets under management, has already gotten on the automation technology bandwagon is offering these service to its clients. In October, the firm launched Betterment Institutional, which was designed to help advisors use its propriety investment technology tools to increase their business, while also freeing up their time, so they can spend more of it with their clients. (For more, see: Tips for Keeping Your Financial Data Safe Online.)

Betterment’s automated investing bundles and “smart user” experience was, in fact, designed based on information from behavioral economics studies. The goal was to help investors and advisors do a better job of investing in exchange traded funds (ETFs) and to achieve improved outcomes. Here are four ways in which this type of automated investing technology has proven advantageous to investors.

Better Tax Efficiency: Using automated technology allows investors to take advantage of improved tax efficiency strategies. These strategies include tax loss harvesting and tax-aware share selling, both of which may increase investor overall returns without adding any additional risk. Investors or financial advisers who use these automated platforms and receive the benefits of lower taxes do so by being able to remove most of the manual time expenditures and human error that can happen in the process. In fact, according to research put out by Betterment, tax loss harvesting automation can add up to 77 basis points on an annual basis to net investor returns.

More Focused Allocation Advice: For those looking to create multiple portfolios that are personalized to their needs, using automation technology can be a great way to go. It allows for the creation of portfolios with varying asset classes and different goals in terms of long and short-term investing horizons, saving for a purchase or saving for retirement. In effect, target date funds can be created set to each goal.

Maintenance Management: Automation technology also allows for portfolio maintenance to happen on an ongoing basis in an automated and tax-efficient way. These tools allow cash flow such as deposits, withdrawals or dividend reinvestment to be rebalanced in a portfolio on a regular basis, again with long or short-term goals in mind.

Outcomes Can Be Previewed: Any kind of movement inside a portfolio including the changing of an asset allocation or a withdrawal may be subject to tax consequences. But by using automated technology or algorithms, such as Betterment’s Tax Impact Preview, advisors and investors can assess the impact of any action before they actually make it. In this way, investors get access to data-based rationale which may help them decide to stay the course, make a move or postpone investment activity in order to wait for a more advantageous tax situation.

The Bottom Line

Automated technology is changing the landscape of investing by allowing for better investment outcomes through increased tax efficiency, more focused management and asset allocation design and freeing up advisors time, so more of it can be spent focusing on their clients' needs. (For more, see: How Financial Advisors Can Adjust to Robo-Advisors.)

 

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