Is a Robo-Advisor Right for Your Investments?
By John Osbon
Is a machine up to the task of managing your money? A lot of venture capital money is betting yes as more and more robo-advisors hit the market. Fascinating stuff but the closer you look, the more algorithms, formulas and artificial intelligence (AI) come up short. Technology has a big role in investing, but there are still many circumstances when human touch and insight just can’t be replicated. Here’s a guide for managing your money in the robo age.
When Technology is Your Friend
Technology is a huge help to us. Our largest single operating expense is our technology budget, much larger than our second biggest expense, our office. I use the word “technology’” as a catch-all for programs, computers, systems, links, APIs and databases. Technology is extremely powerful and helps by:
- Collecting and reconciling all important investments and activities.
- Handling mundane, repetitive tasks like recording complete dividend payment dates and amounts.
- Creating complex "what-if" scenarios based on changing personal situations or goals.
- Monitoring risk limits via custom alerts.
Technology saves time, increases accuracy and gives a better view of your money. Computers do exactly what you tell them to do, undistracted by weather, sick days or emotions. We couldn’t serve clients without them. (For more, see: Pros & Cons of Using a Robo-Advisor.)
What Technology Can’t Do
Advances in technology continue to amaze, but are you ready for driverless cars in downtown Boston at rush hour? Computers can execute commands, but they still can’t think like humans. For as much time as we spend designing, operating and improving our technology, it can only describe or replicate a very small part of what people really need from their money. After entering about six variables into these programs, exceptions or substitutes as we call them, we take over.
Take something as simple as cash. When a client needs cash, many questions quickly arise. What assets count as cash? Drawn from where? When? How? With no tax effect. When it is not available right now, what then? We look at all the options in ways we could never outsource to a piece of software. It takes a human to understand and direct technology in service of the person, not the other way around. (To learn more about investing with robo-advisors, you can sign up for our upcoming webinar: Picking the Right Robo-Advisor.)
Conversation First, Technology After
Artificial intelligence, the most advanced form of technology, promises to make computers as interactive and intuitive as humans, but we’re nowhere near there yet. AI can be helpful if you are completely predictable, logical, understandable and never change your mind. Otherwise, watch out. Imagine trying to model and learn from a conversation with a person who, inside of ten minutes, changes her mind, discusses multiple conflicting ideas at once, speaks in slang, uses humor and says words like “red” and “read” – identical sound – in the same sentence.
The fact is, computers and programs are very poor at understanding human beings. They can’t hear what is unspoken, such as doubt, pain, curiosity or confusion. It takes a human to recognize these and give them appropriate weight. When properly guided, technology can doall the research, grunt work, formatting, sorting and calculating, but only with a human in the loop for judgment, asking the right, common sense questions. (For related reading, see: How to Stop Doing Nothing With Your Investments.)
Combining Humans and Technology
It’s too simplistic to say “I only talk to people” and “I hate this technology I don’t understand.” In truth, we need both tech and people. The combination expands available information and improves investment insight and understanding. Find out how your advisor combines the two for your benefit by asking:
- How much money do you spend on technology?
- Who makes the decision, you or the robot? Can you override the program?
- How can you show me information in the way I want to see it?
Make sure a human watches your investments, tends the robots and is available if you want to have a discussion. With technology and “humanology” combined in the right way, you are much more likely to reliably achieve your investment goals. (For more from this author, see: What to Do With Sentimental Stocks in Your Portfolio.)
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