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.
The Female FinTech Revolution: AI Edition
Women have spent generations making a name for themselves in the work world and gaining control over their finances. The female market is now a strong market for financial firms to target, but you have to know how to reach them. That being said, technology is giving us new ways to reach and interact with our customer base, allowing us the opportunity to offer unique services that better meet people’s needs.
Although women care about their finances and financial security, they are less likely to reach out to typical (human) advisors and have less knowledge of their financial health because of this. The reason for this hesitancy very likely lies in the gender bias that remains in the financial field. If the psychology and language is tailored for a specific group that does not include you, it’s understandable if you don’t feel comfortable in the space.
This of course creates a great opening for entrepreneurs wanting to reach untapped areas of the market. New startups are exploring the female financial field and bringing forth amazing new options.
Joy is potentially the most controversial option on the market, but the logistics behind the app make it a strong contender for women seeking financial advice. The system uses AI to first determine your personality traits and then offers a robot coach that best suits your needs. The language also differs from typical robo-advisors, choosing instead a dialect that is less confrontational. Seeking to make dealing with finance a positive experience, humorous language is used and users are often asked to explore which purchases bring them the most, well, joy. For users who want a less heavy relationship with their finances Joy will be a great new addition to the market.
Brolly is using the AI technology to improve and modernize the insurance experience, making it easier for the modern female (or male) to manage her insurance portfolio. The app gives a clear view of the insurance options available to the user and the AI will offer suggestions and advice to help make the decision process easier. As insurance is stressful enough, the addition of an AI guide will likely improve the experience for anyone not fully confident in their insurance knowledge.
The breakthrough that will most likely catch people’s attention is Jibo. A clear example of what people tend to think of when they think of artificial intelligence (Jibo actually looks like a little robot) Jibo will interact with users and help make life easier. The brainchild of Cynthia Breazeal, it is set to raise the bar when it comes to how intelligent and approachable our AI devices are. Designed to help, the Jibo model could radically change how we think about finance coaches or mentors.
Finance needed a revamp and FinTech was ready to take lead. Now, with innovative entrepreneurs taking charge of the upgrades, the new finance world is starting to take shape. This new world and its new way of looking at finance will help make the system more accessible for everyone, offering options that better meet certain people’s needs. This is the great benefit that comes from AI, which is why it is an area that deserves more exploration. AI and FinTech will truly make finance accessible to the masses, remaking the financial institutions in order to better reflect the end user.
How Responsive AI and FinTech Will Change Your Life
Who do you trust? As we become more aware of the corruption in various institutions, our faith begins to waiver and we start to wonder who we can trust with our assets. At the same time, we have greater technology available to us, changing so many of our options from what previous generations had.
If, like many people, the 2008 financial crisis left you feeling very wary about the big banks and the people watching over your finances, Artificial Intelligence (AI) might be your ideal option. By adding technology to the financial field, data can now be processed and analyzed quicker and at greater levels, and the element of human error is removed. No longer do you have to worry about an insurance misunderstanding causing you to lose your life savings or competing clients causing your investor to push aside your portfolio and extend your wait time.
That being said, many of the current robo-advisors are operating on a safe (and aging) technology system that can’t necessarily react to the changes in the market. Yes, you are getting many of the benefits that come from letting technology filter the data, but the lack of a human element carries major dangers should the market do something unpredictable.
There is a better way. If you don’t feel comfortable handing control fully over to robo-advisors or don’t trust that system, Responsive is your perfect match. Why? Responsive’s system differs from the one used by conventional robo-advisors. Most importantly, its system will shift to work with the changes in the market, preventing its customers from suffering losses due to market dips.
A new type of investment management service, the company is an independent firm that operates on a fee basis, ensuring you will never be pressured into unwise choices by consultants blinded by the potential commission. Clients have online access to their accounts through a registered custodian, easily accessible via the Responsive site.
In fact, Responsive is ideal for customers who aren’t quite ready to completely hand financial control over to machines. The company operates a partner program that means you can maintain your current advisor’s services while also testing out what the new technology has to offer.
As technology changes society and the way it does day-to-day business, people and businesses have to learn to adapt to the new ways or risk falling behind. Finding the right company that makes you feel safe and comfortable as you explore the new normal technology has brought is very important. Once that happens, you will get to see the wondrous things FinTech and AI can do to improve your life.
Case Study: How Vanguard’s Robo-Advisor Platform Leads the U.S. Market
The robo-advisor market is ever expanding and numerous startups are entering the fray hoping to make their mark. These new companies, not yet experienced in the field, will become one of the many failed startups if they don’t learn how to play the game.
Smart startups will look at the leaders in the field and learn from them how to best manage their new business. For robo-advisors, Vanguard can show them what true success comes from. The company, which lists itself as “a client-owned mutual fund company with no outside owners seeking profits,” has launched a robo-advisor platform that is easily eclipsing the success of the other major players.
One reason for its success: Vanguard’s Personal Advisor System melds technology with human advisors, giving investors the best of both worlds and easing the concerns they might have about giving control over to faceless technology. After setting up an account, human advisors guide investors through their goals, concerns and expectations, making sure the right options were chosen and customizing the plans as needed. This human aspect is a huge part of their success, as the personalized interaction means customer satisfaction is much higher. Although startups may not have the manpower available to offer constant one-on-one interaction to their customers, the need to speak to a human cannot be underestimated.
Another main advantage Vanguard has is a large distribution team in the United States and easy access to an already established customer base. In fact, more than 90% of their robo-advisor clients were already Vanguard clients and just adopted the new service. Although this may seem like bad news for a new startup, what it really tells you is your strongest client base will come from pre-existing connections.
In Vanguard’s case, as with many of the established players, this pre-existing base consists of older generations and approximately two-thirds of Vanguard’s clients are retirement age. True, this is the section of the market that have investment portfolios, but startups do not necessarily need to compete for these customers. Instead, focus on the younger sections of the market. There is real opportunity here, as technology-friendly investing will heavily appeal to generation X and millennials.
By using Vanguard as a model, startups can learn how to shape their company in order to compete in the digital wealth management market. Startups should adapt the company’s successful choices to fit with their company. If done properly, your robo-advisor business will move from the startup stage and continue to grow.
How Robo-Advisors Can Reach Millennials
The early stages of a startup are very important. This is when the groundwork is laid and when the company makes its first impression on the market. If the right impression is not made and the right people are not met, your startup will be a part of the 90% that fail to create a viable business.
One of the primary decisions that needs to be made is which section of the market you will be targeting. The techniques needed to appeal to the different segments are very different so you need to know your ideal audience is.
Robo-advisors, being a new and technologically-enhanced service and financial advisor/planner, would be wise to target the millennial market—the largest part of the workforce and already technologically savvy. Of course, reaching these customers requires a knowledge of their habits and likes.
Embrace Your Technology
This generation is deeply linked to smartphones and the internet. Any marketing your company employs needs to use these venues to reach millennials. Make sure your promotions both use these technologies and illustrate how your company uses these technologies in its services and in private wealth management.
Embrace Your Social Media
Yes, this is in many ways a new technology, but it has capabilities that are distinct from other technologies. This is the best way to interact with your market, as it allows you to create a real connection (which in turn will create loyal customers). Also, a solid social media marketing hold the potential to go viral, extending your reach beyond current consumers to potential customers.
Embrace Your Brand(ing)
Millennials are very conscious about what is going on in the world at large and want to support a company that shares its ideals. Put yourself out there as a game-changer and a company with a conscience and you will draw the millennials in. Known in the market as Socially Responsible Investing (SRI), many robo-advisors are embracing this angle. One of the newer entries in the marketplace is ModernAdvisor, a company that states it offers, “socially responsible investing via ESG (environmental, social and governance) portfolios.” Environmental causes and social causes both tend to be of great interest to the millennial generation and clearly tying your company to these movements is a great way to draw in the millennial market and their financial portfolios. (37% say they would be willing to pay more if it meant supporting a product and company they believed in.)
Millennials are a very profitable section of the market, comprising 25% of the US population and 21% of consumer discretionary purchases. Knowing how to reach them is vital for survival in today’s market, especially if you’re a company or product that is tied to the technology field. What does this mean? If you are a robo-advisor, you need to start thinking about your millennial marketing schemes.
Meet the Modern Investment Advisor: The Robo-Advisor
Money. It tends to be one of most people’s greatest stresses. We worry about making it, we worry about spending it and we worry about saving it. If you weren’t born (or taught how to be) a financial genius, the best thing you can do is enlist a certified financial advisor/planner (CFP) to help ensure your plans are solid and your wealth/portfolio investments are safe. For those people who want to be using the latest technology or the people who, for various reasons, can’t meet a CFP in person, there are robo-advisors.
How Will This Faceless System Know My Needs?
Although you are unlikely to engage in inane small talk, the system is set up so your robo-advisor will be able to decipher your needs and invest your money properly. You will be asked a series of questions and your answers to these questions will be used to design your portfolio of exchange traded funds (ETF).
Is It Safe Trusting My Finances To A Robot?
True, the chosen term for the service is robo-advisor, but don’t let that unnerve you or give you the impression that financial control has been fully handed over to the machines. The wealth/portfolio management robo-advisor system is simply a new tool set up to simplify and update the process for modern investors and human CFPs review your portfolio after it is created.
What Are the Advantages to Robo-Advisors?
The system is set up to fully benefit from modern financial technology, a fact younger investors (having grown up with technology) will likely appreciate. This modern technology means startups like Betterment can use Nobel-prize winning algorithms to create their models.
As the system is more automated than traditional CFPs, robo-advisors are available 24/7, which is fantastic news for shift workers or people with very busy work schedules. The fees are also dramatically lower and investors no longer have to deal with the opportunity cost. These savings are added to your portfolio, compounding your investment.
Another perk? There are no hidden fees with robo-advisors, which means fewer surprises in your portfolio.
Finally, robo-advisors are excellent for new investors or people who may not have sizeable assets to contribute. If you have less than $250, 000 in your portfolio and choose to go the traditional route, finding a management firm will be difficult and your choice of investment services will be limited. Not so with robo-advisors.
Creating and managing wealth is a skill that is vital for a healthy life. When your finances are in order you can devote your attention to the other, more important areas of your life. Now, thanks to robo-advisors, you don’t necessarily have to hand your money over to a system that may be hiding its fees from you and insisting you meet at a time that’s incompatible with your work schedule if you want advice. Feel that stress sliding off your shoulders? That’s the power of FinTech.
See How CRM2 Will Affect You
Depending on where you sit, CRM2 can seem terrifying. Because of this regulation change, the books are being opened and advisors are required to go into much greater detail when it comes to their fees, giving investors more information to sort and analyze in terms of the services being rendered. Whether or not you consider the move a wise one, there are five questions that need to be addressed.
Do people need this new transparency system?
According to a survey done by the Canadian Securities Administrators (CSA), two-thirds of investors did not know about the compensation advisors receive from mutual fund companies. Although an argument can be made for the positive aspects of ignorance, investors have a right to know where their money is going. Full disclosure is a necessary part of the business world and excluding the investment field from this concept is not right.
How will this newly gained knowledge affect them?
That being said, the sudden realization of how the money flows has the potential to cause investors to abandon the field of mutual funds. In order to prevent (or limit) this mass migration advisors need to be ready to explain the compensation situation to their clients.
How should fees be explained?
Advisors should always make sure investors know the full range of services they are getting when the advisor is brought on board. Introduce an itemized list of services that clearly lays out where the money is going and the value that comes from an advisor’s services. The hostility that can come from the new knowledge of how the money is divided is lessened when the details are known up front and the full value of those fees is laid out for the investor.
What does this mean for mutual funds?
One likely option in the post-CRM2 investment world is an increase in ETFs, as the new knowledge regarding the fee system will cause investors to stay away from mutual funds. This is good news for businesses that specialize in ETFs and great news for innovative companies that specialize in ETFs.
WisdomTree is one such company that will see an increase in investor interest. One of the largest ETF providers, Wisdomtree has in fact used smart engineering to recreate the process of investing. Their unique “smart beta” products will be of great interest to investors who now know where their money is actually going.
What does CRM2 mean for robo advisors?
Robo advisors are the most likely winners in the new CRM2 market. With low fees already in place the reveal of their added costs won’t be as startling to current users while disgruntled investors choosing to explore their options are likely to be swayed over by the lower costs. Add in the additional benefits of the robo advisor system (increased access, easy-to-use platform systems) and the robo advisor system is going to come across as the best option for the financially-savvy consumer. Startups like Wealthsimple and Nest Wealth can use the new market rules to stress why their system is best for the modern investor.
CRM2 is bringing the investment market into its next stage. If handled properly, this evolution of the market will result in more content investors who feel fully knowledgeable about their investments. This new stage is also great news for FinTech, as the increased disclosure element of the new regulatory system shows that FinTech is the best option for the smart investor.