Should you trust a robot with your life savings?

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.

roboadvisor typing

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:

  1. 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
  2. Easy access. More clients are choosing robo-advisory because it is quick and straightforward
  3. 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.

alphago confusion 2

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?

robots steal jobs 2.jpg

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.

robots and humans collabo

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.

 

6 comments

  1. This is a great post. This reminds me of a discussion my core econ class had last fall. My professor, who also works for the Federal Reserve, told us that the investment banking/wealth management industry would be obsolete in a couple of years, because of the very same reasons you stated here. I liked your comparison to the agricultural industry during the Industrial Revolution: I very much agree that you can’t halt progress. These changes will be made, there will be a backlash within the industry, but then slowly humans will adjust and find a way to work with the new technology. It is nice to also think of the positive ramifications of AI controlled finances. It lowers the barrier of access and financial investments will not be just a tool for the upperclass. Maybe, in a way, removing the human investors from the wealth management sector will actually open up and make healthy, financial futures a possibility for all classes.

  2. britt_hopkins4 · ·

    As someone who interned in Wealth Management and will be returning full-time, I found your post really interesting. This was a highly discussed topic this summer at my office, but contrary to the individual you quoted in the beginning, I don’t think robo-investing will take over the entire Wealth Management Industry. Clients come to us and trust us with their money not only to invest it, but for the service they get. They can’t talk to a robot about a concern they have with the market or with a family situation that is going on. I agree that robo-investing will become more popular and think you nailed it right on the head with your last paragraph. The clients with hundreds of millions of dollars definitely should not trust this method. I’m looking forward to seeing where this goes.

  3. Yvette Zhou · ·

    Nice post! I don’t need any financial advisor currently though Lol. I think you have cited great examples to illustrate your points about AI and I totally agree with you that AI cannot replace humans. The point you have made is very critical here: AI is not highly personalized. And what differs AI and human brain is personalization. We can say that two robots are technically the same if they are coded by same calculation. However, many decisions we made in life are different not based on only rational thinkings but also emotions. In addition, many decisions can be only made by emotions. All these decisions cannot be made by AI because robots don’t have personalities and they cannot copy your personality. Meanwhile, AI can definitely help human on complex works like finance, engineering…. Like what you said in the post, human should pursue a win-win situation while using AI, which will develop our society and make the world better!

  4. whitmcdonald2 · ·

    Joon, this was a super interesting post- thank you for sharing! I think that this is a very big concern with a lot of industries right now. Wealth management, banking, retail, grocery shopping, etc. It is scary to think how different our world will be in just ten years with this development of AI and robots, etc.

    I am hoping that there is a much greater need and want for the “old-fashioned” experiences of these things, especially with the very important things like financial security. I know I will be hesitant for a good amount of time if AI or a robot will take over my savings, but I said that about Venmo and here I am using that app every other day. I’m curious as this phase of technology, AI, and robots continues to grow relevance and power in our society, what security preventions will take place in hopes of keeping these strategies safe. It seems like right now we are inventing more and more but not thinking about the security until it is an afterthought. Concerning for sure- again, thanks for sharing!

  5. I think many of us are likely invested with Robo-advisors, at least to a certain degree. There are algorithms based on optimal risk-return ratio that are then communicated and explained through human advisors. Robo-advisors just go that last step and cut out the human broker!

  6. clairemmarvin · ·

    I just had to read this post because my best friend and I were literally just talking about this last week! She works for Blackrock and was telling me how she is planning on using a robo-advisor to manage her portfolio. I told her I thought that sounded crazy but after reading your post I honestly might consider moving my money over too. I agree that while robots are going to continue to dominate certain fields, I welcome them as a way to optimize the human workforce as well. If we can have robots doing the tedious analytical jobs humans just aren’t built to do, we can take it one step further and improve upon the work of the robots to create something truly amazing that has a human touch to it. I guess this also begs the question as to whether most large businesses will incorporate robots into the future of their digital strategy operations. If I had to guess, I would say yes, but only time will tell.

%d bloggers like this: