Is A 'Robo Advisor' In Your Financial Future?

Question: Would you trust a robot as your financial advisor? The question is not farfetched. Today, there are a large number of financial management companies that use robots a.k.a. Robo Advisors to advise and manage the accounts of investors.

The largest of these companies by assets are in the United States, Great Britain, and Canada and include:

• The Vanguard Group
• Charles Schwab Corporation
• Betterment
• Wealthfront
• Personal Capital
• Nutmeg
• Wealthsimple
• E-Trade
• Ally Financial

Again, this list represents the largest financial management firms. There are a whole lot of companies today that feature these advisors.

What Is A Robo Advisor?

To understand the concept of robots providing investment advice you need to know exactly what Robo Advisors are.

First introduced in 2008 during the financial crisis, these advisors are financial counselors that offer financial advice or investment management online with some or very little human intervention. Their advice is based on mathematical rules or algorithms that are operated by software that manage and improve a client's assets. The Robo Consultant commonly assigns a client's assets on the basis of risk preferences and desired target return. These robots can apportion assets into a number of investments including stocks, bonds, futures, commodities, and real estate. However, in most cases, the resources are guided into Exchange-Traded Fund (ETF) portfolios. An ETF is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund and they trade like a common stock on a stock exchange. Clients can choose to be passively or actively involved in the process.

How Robo Advisors Work

When a human client first encounters a Robot Advisor he is asked to provide information on his current financial condition and his future goals. The Robo Advisor takes this data and computes where the client should invest his money. The suggestions are based on a given level of market risk with the goal of achieving maximum return for a given risk.

These machines, like IBM's Watson, can analyze a human client's personality to determine how it influences his risk-taking behavior in financial decisions. The machine uses personality insights to determine a person's temperament from available content the client has provided. The deduced personality is then used to determine the client's risk tendency and helps the machine select recommendations.

Who Uses Robo Advisors?

Investors who use Robot Consultants include:

• Registered Investment Advisors and Financial Advisors
• Millennials
• Retirees
• Individuals with high net worth

Registered investment and financial advisors benefit from Robo Advisors because they streamline investment management and financial advice making the process of serving the client more efficient. The human advisor can concentrate on the tasks that a robot cannot perform.

Millennials love using Robot counselors because they have been raised on technology and it is a major element of their lifestyle. Millennials also like this type of investing because it is less expensive than relying on a human advisor and often enough they don't have the money to capture the attention of a human advisor.

Retirees will be a growing segment of this group because more and more investors near retirement age are relying on these machines and so when they retire they will continue using them.

Individuals with high net worth rely on Robo Advisors for a portion of their wealth while they continue to use human advisors.

In the long run, though, all investors will be using Robo Advisors. It is predicted that Robo Advisors will manage as much as 10 percent of the entire worldwide assets under management (AUM) by 2020. That equates to $8 trillion.

Indeed, as you can see we are witnessing a brand new world in which machines that can learn will touch just about every element of our lives.