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Robo Advisor

One of the most popular movies of 1987 was RoboCop, set in a dystopian Detroit in the year 1990 and featuring a combination of man and machine built to eradicate crime and bring the city back to its former peaceful state  (Yes, Detroit).  

One of the central themes of the original RoboCop was examining the question: can science make a better human?  The 1987 film was clearly science fiction, but by the time the 2014 reboot was made the question switched to: we can put a human inside a machine, but should we?  

While we haven’t yet taken advantage of the clearly superior crime fighting capabilities of cyborgs, Artificial Intelligence (AI) is rapidly finding its way into our everyday lives – from listening to music to navigating the traffic patterns of our clogged city roads. And now perhaps even managing our investments.  

RoboCop is not going to save your life anytime soon, but RoboAdvisor is ready to save you money now. 

Unfortunately the relentless advertising by certain robo advisors has lead the average investor to believe that this is about one thing – fees.  But, computers offer other advantages as well with respect to investment management.  They are faster, capable of analyzing large quantities of data, and they make decisions based on facts, not emotion.  

The number one problem for most investors is behaviour.  Their behaviour.   Studies consistently show that the average investor dramatically underperforms the markets simply because they make decisions to buy or sell at the wrong time, and are in and out their investments too often.  The enemy it would appear is emotion.

Enter the robo advisor. This emotionless entity won’t sell just because the market is tanking, or buy just because everyone is buying. With feelings out of the way, it will make only right decisions at the right time.   Sounds perfect.

Before I throw a little water on this argument, let me state emphatically that I think computers and investments have a great future together.  Good advisors all want to see investment fees go down, and they realize the power of the computer to quickly build strategic portfolios to suit long term objectives and to keep those portfolios rebalanced over time.  The combination of robot and human (aka RoboAdvisor) is I believe the future.  So why can’t the computer do this all by itself?

First of all, the idea of a computer building and maintaining a portfolio is far from new. Countless funds over the years have used a quantitative strategy essentially building a portfolio from a computer algorithm.  Has one landed on the perfect recipe for investment success?  Not yet.  Perhaps not ever.  Why?  Well, partly at least because the investments themselves, the businesses that put stocks on the market allowing investors to share in the profits, are run by people.  People with emotions.  People who make surprising decisions – some good, some bad, some illegal.  Often, the data doesn’t tell the whole story.

And secondly, the investor is still in charge.  Yes, the robo advisor is cheap.  But when it fails to deliver positive returns when the markets are going down, rest assured that many humans will fire the robot and move on to another robo advisor that has done better during the period in question.

There is no doubt that AI is going to continue its transformation of the financial industry. While it is unlikely that you will ever find yourself sitting across from a half human half computer RoboAdvisor, I firmly believe that it’s this combination of emotional being and unfeeling robot that will in fact be the advisor of the future.