Robo-Advisors or the Central Bank – Who’s Responsible?

Technology is vastly improving our world. That being said, it’s not infallible and blindly putting our trust in it could be a dangerous way to go. This is an important thing to consider when looking at the financial world and the increasing automation of certain areas. The technological revolution carries with it questions concerning how much we should rely on these new advantages and how much responsibility we should attribute to them.

Let’s look at the stock market. On Monday (February 5, 2018) the market was troubled and, while the stocks were fluctuating, Wealthfront and Betterment suffered major technical issues. Without warning users suddenly had issues accessing their accounts and the websites themselves crashed. While this is going on, cryptocurrency dropped in value. As you can imagine, this compounded the stress on already edgy investors.

So who’s to blame for that very stressful day?

Let’s start with the robo-advisor technology. Is this where the fault lies?

It should be noted that the robo-advisor system is still in its early stages and, as such, has yet to conquer enough crises to develop a foolproof system. Without the experience gained from facing adversity, the system is unclear of how to handle sudden extreme issues in the market. When compounded by the mass traffic the sites were facing because of the crisis occurring, it’s not shocking that there were technical issues.

(Also, to be fair, if 5000 people were calling your investment banker at the same time, you would have issues getting through to them too.)

After a brief period of turmoil, the robo-advisor systems were back up and running.

Assigning blame for the crash to robo-advisors is, in many ways, picking on the easy target. As robo-advisors are a new technology many people aren’t quite sure of their impact on the financial world and putting full blame on the machines allows certain powerful figures to deflect the importance of other factors.

If the blame doesn’t lie with robo-advisors, where’s the root cause? Would it shock you if I suggested the central banks had a hand in the crisis?

For quite some time the major bank system has been using low interest rates and quantitative easing in an attempt to drive shares up. This was not a sustainable plan for the long-term and the instability of the future market compounded with the fear of inflation could easily have led to the stock market taking a dive. Will the stock market turmoil lead to the central banks easing up on their market manipulation? Highly unlikely. The need to project a healthy economy is why these actions are done and this need will continue regardless of how the stock market is faring.

What does this mean? As long as the central banks are doing their job and promoting the best interests of their financial hubs the stock market will be built on shaky grounds. This is something important to remember.

But were the central banks the full reason for the turmoil? We’ll look at one final angle tomorrow.

Whenever the stock market falters, people are quick to hunt out the culprit, as if pinpointing the source will prevent the situation from happening again. It’s easy to blame the machines or “the man” (a.k.a. the government) but it’s important to remember that this is in many ways a natural occurrence.

Market fluctuations are not new. In the grand scheme of things, Monday’s bloodbath wasn’t even that bloody compared to the depression and recession tumbles and chaotic days on the stock market are a common occurrence in day trading. .

The fact of the matter is if you want unstressful investing, well, you are unlikely to find it. (Even high interest savings accounts are at risk for reduced rates and, depending on your country of residence, the stability of your banking system.)

Was there a single obvious cause for the market dip? Although the machinations of the central banks should be carefully examined for culpability, probably not. It was yet another stressful day of trading for Wall/Bay Street that kept advisors (both human and robo) incredibly busy. Thursday proved to be stressful as well, and yet the market keeps on moving.

Wannabe investors should take solace in the fact that modern investing tools are not the source of market chaos and the robo-advisor system remains a viable option for those of us who need a modern, more accessible investing system.

It’s been a stressful few weeks for investors, watching as their portfolios’ worth ride a rollercoaster of value. Someone (or something) needed to be held accountable and fingers were pointed wherever the blame might stick.

Although some people may want to point the blame at robo-advisors, arguing that the breakdown of the robo-advisors shows that the technological system is flawed and we should just dismantle the technology and stick to the old ways, it should be remembered that no system is without flaws. Human workers have supervisors and we have a whole job field devoted to the concept of quality control to try to minimize problems. We may want perfection from our technological tools but this is a bit of a pipe dream.

For those who have weathered this stressful period, fear not. The markets will rebound and robo-advisors will continue to be a major help to modern investors.