The thought that robots may replace millions of humans in the workforce is far from revolutionary, and one I certainly did not concern myself with on a regular basis. I understood that there was a countless number of tasks that artificial intelligence would always be better at doing than any human—that is precisely the reason AI was created in the first place. But I was really thrown off guard this summer, when a fellow intern came up to me during our firm-wide training and said “you’re lucky you’re in investment banking. I accepted my wealth management internship but I’m looking for other opportunities.” When asked why, he claimed that his line of work had no future because of the recent advances of robo-advisory.
For the past couple years, robo-advisors have indeed been stirring somewhat of a digital revolution within the wealth management industry. They offer automated, financial planning services through the use of algorithms and Nobel prize winning investment theories. Evidently, the advantage here is that robo-advisors are very precise in judgement and investment advice because their decisions are based on 100% calculation, 0% gut feeling.
That is not to say of course, that there are no setbacks to robo-advising. The primary issue is that while they are not a one-size-fits-all investment planning tool, they are not highly personalized either. This means that as of now, they cannot not provide clients with solutions to issues arising from unquantifiable factors like a divorce, for example. Taxes and real estate planning for the long term are also not strong suits of the robo-advisor.
However, they do offer:
- Lower fees. Professionally managed investment assistance in the traditional sense charged fees above 1% on assets under management (AUM). Autonomous robo-advisors charge fees as low as 0.25%, favoring cost-conscious clients
- Easy access. More clients are choosing robo-advisory because it is quick and straightforward
- Low minimum balances. Investors with small net worth can now receive professional investment advice. Some robo-advisors are accessible with an AUM as low as $1,000 as opposed to the standard $500,000
At the same time, it is very possible that there will come a day when robo-advisors can devise sophisticated solutions to tax, real estate, and relationship issues. To side track for a moment, consider the computer vs. human duel in the game of Go, a 2500-year-old Chinese board game that allows 361 possible opening moves compared to Chess’ 20. Alpha Go, the computer developed by Google, beat Lee Sedol, the best human player in the world, four games to one. Appalling as this was to humanity, it was understandable, as Alpha Go was algorithmically programmed to react to the opponent’s move by remembering millions of matches and every single move ever played in history. What was truly shocking was that Alpha Go made a move never seen or played before for 2500 years, baffling both Lee and the commentators. A dozen moves later, humanity realized the sheer genius in that move.
Similarly, robo-advisors may be able to devise unique and groundbreaking solutions to personal financial issues that have never even been considered before. And they probably will. So if AI can take over the most lucrative and complex industries like finance, should we be trembling in fear? Is it really a threat to human financial advisors, and on a larger scale, to human employment in general?
Not necessarily. While a handful of jobs will inevitably be lost as robo-advisors develop new levels of sophistication, I think it may present an opportunity for us to realize and specialize in what humans do best. To draw on a parallel from the industrial revolution, farmers were initially furious that their jobs were being taken away by incomparably more efficient harvesting machines. But innovation and change cannot be undone—once they learned to take advantage of and live in harmony with these machines, the agriculture industry really took off. It was a win-win for all parties involved. Similarly, I think that robo-advisors (the AI) and financial advisors (the human) working in tandem to offer a more integrated and complete service, generates synergies that provide more value to the client than either one on its own.
Large exchange traded funds and asset managers have already started moving towards this direction. Vanguard has launched an internal robo-product, Blackrock has acquired FutureAdvisor, and it seems other heavyweight ETF are in hot pursuit. Under this new structure, the robo-advisor can handle the tedious task of choosing assets using its algorithms, giving financial advisors more time to provide clients with the human touch—handling the clients money creatively when the market does something unprecedented, when the client becomes seriously ill, or when the client’s business is under extreme duress for example.
So the bottom line? If you are willing to invest a nominal amount, an independent robo-advisor can work magic on your money. But if you accumulate wealth and want to minimize risk, seek a financial advisor that is adept at leveraging the capabilities of robo-advisors to the fullest. The last thing you want to do is entrust your entire life savings with an independent robo-advisor with no human supervision, only to be hit by a financial crisis similar to the one that took place in 2008.