It is said the only constant in life is change. This is certainly true in the world of money management.
The latest change to occur is called Robo Advisor this appellation may conjour up images of the Lost In Space Robot flailing his arms about shouting “Danger Will Robinson, Danger!” but it is in fact the name of a totally new way for people to handle their investments.
In the not too distant past most investors would hand over their nest egg to a human money manager.The idea being the money manager had the time training and temperament to do a better job than Joe or Jill investor.
2008 proved the fallacy in this idea. Today everything in the market happens at light speed. It is impossible for an individual no matter how skilled to keep up. Firms handling Billions figured this out in the early 2000’s and they began employing computer geeks who could come up with algorithmic templates to better keep track of market moves. robo advisors are the offspring of this switch to computer generated algorithmic money management. The only difference is that robo advisors provide portfolio management online with minimal human intervention. Until recently, portfolio management was almost exclusively conducted through human advisors and sold in a bundle with other services. Now, consumers have direct access to portfolio management tools, in the same way that they obtained access to brokerage houses like Charles Schwab and stock trading services with the advent of the Internet. Since computers are cheaper than people firms like Betterment.com have been able to bring this type of portfolio management to the masses. Currently Betterment has $840 million under management. Even Doctor Smith would be impressed!
The changes being wrought by the growth of robo advisors is truly revolutionary.
The traditional models and modes of investment management by professionals are being turned upside down. Since the technology used by the big firms is now available on a vast number of trading platforms
Robo advisors can service many more customers and do it at a lower cost. Most robo advisors operate on a sliding fee scale, generally charging a smaller percentage based on the amount of money the client has under management. But even at the higher fee levels, robo advisors are still considerably less expensive than traditional investment advisors. Another big advantage robo advisors have when it comes to cost is transparency and comparability.
Since robo advisor systems are based on well-defined program parameters, it’s much easier for investors to compare services and fees between various advisors. That comparison was always more murky between traditional investment advisors. The uniformity of the programs used by robo advisors allows customers to compare fees among different companies easily.
The true impact of the robo advisor revolution will be seen with our present day young people.
Since most young investors start out as small investors. An entire generation of young investors will come of age in an environment where using the services of a robo advisor will be the norm.