Even seasoned investors can sometimes have a hard time understanding why nowadays everyone seems to believe that they can become successful investors.
People usually learn how to invest in their future through education, hard work, and natural aptitude.
Is a person working a 9 to 5 job in a non-financial sector able to become a successful investor?
As technology advances, people are putting more and more trust in investment machinery.
What is a Robo Advisor?
A robo advisor is exactly what it sounds like: technology that uses algorithms designed to create and manage asset allocation considering a certain risk level.
This means that this technology rebalances your portfolio automatically to keep it in check with the estimate of your personal risk tolerance which is determined via an online questionnaire.
Of course, chances are it will not remain stable over time because assets such as stocks and bonds will see an increase in value at different rates.
The tendency of stocks to outperform bonds will cause your portfolio to become riskier in time. Here’s where the tireless robo advisors come in, using their algorithms to change your asset allocation and bring your portfolio back on track.
What’s Changed?
As Baby Boomers age, their accumulated wealth will start flowing towards the new generations.
Financial advisors are starting to become concerned about losing clients to the new AI technology. Millennials seem to prefer this low-cost alternative to money management, disrupting the financial advisory business.
This ridiculously cheap entry to investing seems very attractive to millennials who don’t to commit to financial advisory companies.
Another important change in the world of investment is the rise of big data.
Nowadays, we use highly efficient ways to gather and store data that companies and governments can share and access as they please.
Online user behavior is constantly feeding this beast, no matter what your privacy settings are or whether you use Facebook or not.
Most of our everyday life happens online, allowing third parties to track our characteristics and use them in sales and advertising. However, all this information is useless if you don’t have the appropriate means to process it.
This is also valid for financial markets. One single person could only comprehend a small fraction of this vast data, and as a result, could not use it in the decision-making process properly. Only a robot can.
Can Financial Illiterate People Invest?
Most studies focus on trying to prove people’s financial knowledge is low and that they should receive more financial education.
A recent study shows that 60% of Canadian households have some degree of financial illiteracy, regardless of education level.
Surprisingly, the illiterates are actually well aware of their lack of abilities in this field, and as a result, engage in less risky financial behaviors.
Financial illiterate households adopt a fully rational portfolio strategy, meaning they show smarter financial behaviors than financially literate households.
Robo advisor technology can mean that financial literacy could become obsolete soon. Consumers seem to gravitate more and more towards digitally-provided advice from banks. More than half of retail bank customers say that they would prefer receiving digital advice through a mobile app or a bank website.
Is a Robo Advisor right for me?
Before you consider using a robo advisor, it is essential to be aware of your goals and what you expect from your account.
Are you planning on using it to save money to put a down payment on a house or to use for your retirement?
Before you start working with a robo advisor, you have to be able to answer specific questions such as:
- Do you have a flexible goal?
- Are you going to spend money from this account soon, in less than a few years?
- Are you okay with the possibility that the market will be against you and you won’t have enough in your account to reach your goals?
A robo advisor works best for those who have a firm grasp on the details concerning their financial goals. This technology does have several advantages over a real, human advisor.
AI advisors can save on fix costs such as maintenance and salaries, charge lower fees and reduce minimum investment requirements.
Moreover, they can outperform their human counterparts when it comes to tax harvesting and reducing behavioral biases. If, however, you have questions about your financial goals and are struggling to realize what information you need to input, it might be best to opt for a human advisor.
A human advisor can pick up on the impact of changes in your life and the specific needs you have.
When you have a person as an advisor, they can relate to your struggle and guide you, adjusting the plan accordingly. A good human advisor will, of course, cost you a lot more and you will need to invest higher amounts.
A minimum investment with a robo advisor is around $5000, while with a person, it will probably be ten times that.
If you don’t have the time to commit to learning the ropes and are looking to invest out of interest, a robo advisor might prove to be a perfect choice!