Would You Trust A Robot With Your Money?
Should You Hire a Robot as a Financial Advisor? [Source: https://www.youtube.com/watch?v=UPvfGWsg7po]
Every year the Consumer Electronics Show features robots doing amusing things. Whether it's Honda's ASIMO humanoid robot shaking hands with dignitaries, or the round robot whose mission it is to vacuum carpets - there seems to be a novelty robot for everything. This year there is much more to look forward to. First, there's the holiday shopping season that will result in coffee-making robots, lawnmower robots, and even childcare robots. The second is the reboot of the 40-year-old Star Wars franchise, which has plenty of robots known as droids.
Fun, yes. Entertaining, without a doubt. But what do serious robotics experts and inventors have to say about the fact that the world doesn't seem to take bots seriously unless they're welding a car frame together? That's a question that was burning inside a brilliant young engineer's mind whose family had emigrated to the United States from China. After landing a job a Microsoft, he prudently shopped around for wealth advisory firms that catered to people like him: not rich at the moment, but with a lucrative career in a high-demand field, he might have some funds to invest down the line.
It turns out that few firms were interested in a millennial without substantial savings. Bad move. Analysts predict that despite the economic woes plaguing the West, millennials as measured as an entire generation might have as much as US$ 7 trillion in cash to invest by 2020. Wealth management's business model is not unlike that of, say, residential real estate or book publishing: It's much better to land a couple big fish and reap the considerable commissions from being their agents than to spend precious time with clients whose commissions are relatively small. The engineer, Bo Lu, devised his own computer program that would address the penchant for millennials to do business digitally (87 percent of world accesses the Internet with a mobile device) along with their generally low satisfaction with traditional wealth management firms. His solution was elegantly simple: A user lists her risk appetite and existing investment portfolio and Lu's robotic FutureAdvisor would essentially take care of the rest using his proprietary algorithms, guiding him/her to suggested investment vehicles.
Although this story didn't exactly herald in the genesis of the robot wealth advisor, it nevertheless demonstrates how robotics trump the human touch when humans are less-than-interested in serving consumers. Not only can robot advisors be smarter and better wealth advisors than their human counterparts; they have no qualms about spending as much time as a customer requires to feel comfortable about building an investment portfolio for the long haul. Moreover, 'roboadvisors' are far more arithmetically accurate, and can take decisions rationally (as opposed to a human investment advisor who may be emotionally affected by market ups and downs when dealing with clients).
According to the mutual fund industry trade group ICI, only five percent of the US$ 16 trillion that American households have invested in mutual funds are in the millennial age range. Perhaps that's one of the reasons wealth management professionals have a tepid interest in serving that age group. Mutual funds charge considerable fees, and many millennials are shrewdly shopping around for investment products that mimic mutual funds but don't come with substantial fees attached. In an investment market with miniscule interest rates, high fees, and commissions paid to advisors, a stock must perform brilliantly simply for an investment portfolio to break even. The good news for the hard-working and ingenious Lu was that the behemoth wealth management firm BlackRock recognized a good product when they saw it. BlackRock snatched up FutureAdvisor, which at that point already had US$ 700 million of assets under management, rather than build its own robot advisor from the ground up.
FutureAdvisor is just one of many robot advisors. Many firms in this evolving space charge far lower entrance thresholds than the established wealth management players, so they can begin their relationships with younger consumers earlier and strengthen those relationships as robot advisors efficiently and relatively cheaply build their portfolios. With built-up trust comes an added advantage: A firm can develop new investment products and sell their consumers on them using robotics rather than the 'used car salesman' pitch so often typical of human reps.
One of my favorite counter-arguments to the robotic wealth advisor is that bots lack that lifetime of experience in investing and the innate nurturing of customers. Well, if you've ever followed that popular Wall Street Journal investment feature, in which someone who throws darts randomly at a board emblazoned with industries and companies and invests in where the darts land, you'll know how important a 'lifetime' of experience is when choosing wealth advisors. In the Journal feature, the random dart board often boasts better investment returns than the carefully chosen portfolios of human advisors.
So this holiday season, when your senses will be overwhelmed by examples of entertaining robotics, know full well that serious robots are already serving humans and will continue to do so as they improve their performance and efficiency. A combination of artificial intelligence, robotics and human aspirations will take banking and investing to the next level in the next few years.