Up until recently, it was the general consensus of opinion that robo advisors were normally used by novice investors. The digital investment platforms were believed to be similar to support wheels on a bicycle for newbies with neither the experience nor the assets to play in the big leagues. There may have been some truth to the assumption earlier, given that robo advisors do make investing a rather easy process for newbies and small investors with limited funds.
However, rookies and small investors are no longer the ones who exclusively utilise robo advisors, according to data revealed by a recently published report. This data comes from the renowned data analytics firm, Hearts & Wallets. It reveals that experienced high-profile investors are also utilising these AI algorithms to their full advantage. If anything, their usage, application, and dependence on robo advisors is much greater due to the obviously larger scale of their investments.
Contradiction: Reality Vs. Assumption
It should be duly noted that the contradiction between assumption and reality is far greater here than it seems at first. It would have been surprising enough if a significant percentage of investors using robo advisors were high-profile, but the percentage is more than significant. According to the report already cited above, a majority of all investors using digital investment aids belong to high profile categories.
What this means is that the clients depending on software wealth management resources, primarily belong to the wealthiest category of investors and not small investors with limited funds at their disposal. For example, the survey revealed most of the investors who rely on robo advisors have no less than half-a-million dollars in investable asset value, with significant experience behind them. Therefore, the contradiction between reality and assumption in this respect is evident.
Robo Advisors and Human Advisors are Often Used Simultaneously
Another difference between fact and assumption was made evident by the study when over 57% of the surveyed investors revealed that they do not always use robo advisors as replacements for their human financial advisors. In fact, they utilize both software and human intelligence simultaneously, making them complementary to each other, so that the investor can reap the maximum benefits.
Understanding Software Investment Management Systems is Crucial to Success
Irrespective of an investor’s financial prowess, the success of their investments made with the help of robo advisors depends mainly on how well the investors understand how they work, what they can help them with, and when to use them. Andrew Goldman from Wealthsimple explains what is a robo advisor and how it automates nearly every aspect of making stock investments. The post also explains how the algorithms work, the advantages they have over traditional stock managers, how they can afford to charge a lower fee, and much more. It’s a comprehensive, informational post that does a fine job of introducing us to the concept of robo advisors, along with providing guidance on how to use the software resources intelligently.
Robo Advisors Being More Cost-Effective than Wealth Management Firms is a Crucial Discovery
Perhaps the biggest cause for worry that already has major investment firms and stockbrokers on the alert regarding software advisors is that they are more affordable. It has already been discussed that robo stock managers are also being used by major investable asset holders, so affordability may not seem like a real difference maker. Yet, the fact that they cost less money to utilise is proving to be a major difference maker nonetheless.
This is due to the fact that any good investor prefers cost-effectiveness, although they seldom care about how cheap or expensive the service is. In other words, wealthy and experienced investors care more about the ROI than the investment. They are in it to make money by investing money, so they won’t mind paying more, as long as it helps them to earn more. Robo advisors, on the other hand, are charging significantly less, while offering nearly the same level of service as human wealth managers. As a result, the larger the investment, the better the ROI becomes for the investor, as they have to pay a lot less in management fees.
These findings and inferences were drawn in respect to the wealthy, high-profile clientele, but they are not the only ones who trade. Smaller investors have a share of the market as well, and to them, robo advisors make a lot of sense as well. Given that the algorithms do not distinguish between clients based on their financial portfolios, the smaller investments receive no less attention from an intelligent software. Even for small investors with little experience to guide them, the ROI much better with software wealth management systems.
Tax Loss Harvesting with Robo Advisors
Taxes and investment returns never go well together, given that the former can cut down the latter quite extensively. This makes it imperative to have a tax loss harvesting strategy in place that can reduce the impact, as best as possible. It is a classic method where the trailing stocks are sold off periodically at a loss to keep the Canada Revenue Agency (CRA) from registering high, short-term capital gains. The portfolio is still maintained at the same time, by reinvesting in stocks of similar value. The investment losses are used to intentionally offset an investor’s total, payable capital gains tax amount.
Tax Loss harvesting is a time-tested trading strategy that trade investment managers have been using for decades to minimise taxes for their clientele, so it’s not exactly a novel or a unique feature of software investment advisors. However, software has two advantages that are truly unique to the robo advisors:
- Automation leads to faster, seamless actions
- Cheaper rate of service
Limits of the Algorithm: There Might be None
Ever since robo advisors first came into being, many shortcomings of having a software program manage everything have been pointed out time and again. While the limitations can be subdivided into smaller categories, the core problem has always been around the lack of true intelligence, or flexibility, to be more precise. However, that may no longer be as valid a reason as it was, even just a couple of years ago.
An algorithm had already passed the Turing Test back in 2014 and today’s latest AI systems are infinitely more advanced than the Eugene Goostman program was capable of achieving back then. Although a program’s ability to duplicate human behavior may seem deceptively unrelated to the complexities of managing investments, it is not so in reality.
Trading and every other aspect of wealth management are all about predicting and simulating human behavior, be it on an individual scale (client-side) or on a mass scale (market analysis). Deep learning is a constant process that keeps on evolving with every single second that the intelligent algorithm is in active use. As far as flexibility is concerned, there might soon be no limits to using a robo advisor at all, in terms of flexibility and handling complexities at least.
A More Reliable Option?
This is perhaps an aspect that concerns small investors more than wealthy clients, but it is a major advantage all the same. Even though an investment management firm might promise that they will cover every aspect of a client’s wealth management needs they will not be handling them personally unless the client is big enough to warrant their attention and effort. For small investors, they will skip the micromanagement and adhere to the predetermined portfolio instead.
The software, on the other hand, has no such preferences and will micromanage portfolios of even sub-$1,000 clients, proving themselves to be a more reliable option for financial advice and management. This is part of the reason why robo advisors were first used by small investors without large investable assets and to date, that benefit remains as valid as ever.
One Less Aspect to Worry About
Large investors usually have numerous investments ongoing at the same time. This makes it both difficult and costly to manage them all effectively. Given that modern wealth management software is perfectly capable of handling all aspects of wealth management, without human interference, a preference towards robo advisors is quite natural from the perspective of the large investors.
Aside from making things easier to manage, this simultaneously opens the door to making more investments, without increasing the cost of doing so. For smaller clients with little experience, robo advisors are the only way they could get a piece of the action without suffering huge losses in the process.
It was admitted by the very programmers who developed the latest money and stock management systems that their programs are not meant to replace financial advisors. Despite the capabilities of their intelligent software, it cannot assure, reassure, explain, and guide investors in real-time as human experts can. The goal is to make human and artificial intelligence align so that they can make up for each other’s shortcomings and benefit the clientele in the process.
