What is... | November 19, 2015

What is a robo-adviser?

When asked to imagine a robot, do you picture a futuristic, human-like machine, with two arms, two legs and even two eyes? Knowledge of robots often comes from science fiction – but the robots already among us are typically little like those in films or books.

Yes, there are mechanical robots that help build cars and perform surgery. But there are also software-based, digital “robots”. One example is “robo-advisers”, which were invented to help with investment choices – and are becoming more common.

Automated investing guidance
Many of us have used online platforms to answer surveys or enter data into forms on a website, perhaps to apply for something. A robo-adviser is a digital platform that guides investors through a maze of portfolio options to help them make a decision.

Customers are typically taken through a series of questions asking for information about their financial situation. Robo-advisers then analyse their potential investments based on that information. A US example is Schwab’s Intelligent Portfolios. On the website you can get a quick idea of how robo-advisers can help create an investment portfolio.

Financial decisions can be difficult
Demographic and economic changes mean more people are being asked to choose between financial options that can affect their future. Making the right investment decision can be complicated and time-consuming – see a list of 10 areas to consider here. It can be easy to make poor choices as a result of common thinking traps and biases – here are just eight.

Spreading benefits, controlling costs
One idea is that robo-advice can help investors who don’t have the time or resources to learn about investing or pay a professional adviser. This can enable the financial services industry to help a wider range of people as well as keep its costs down. And by automating parts of a process, investment professionals can free up their time to focus on the more complicated and human-oriented parts of their jobs, or even develop new products.

Best of both worlds?
But robo-advisers are not without their critics. Automated advice may not always give the best answer for the specific situation of an individual investor. And the formulae used in the calculations may ignore behavioural factors that typically affect investment risks and returns. They may not take into account, either, that share markets may not perform like they did in the past.

As a result, the brightest future for robo-advice technology may be in complementing professional financial advice given the traditional way, in person. Doing things online has become more popular, but many people may prefer to speak to a "real person" anyway.

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eZonomics team
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