Ai investment "advisors" to manage over $2 Trillion by 2020
Robo Advisers to Run $2 Trillion by 2020 if This Model Is
Right
by Michael P Regan
June 18, 2015 — 9:55 AM PDT
The robots are just getting their metallic feet wet in
the investment advisory business.
Well, they're not really robots of course, just software
that automatically invests and rebalances according to clients' goals and risk
tolerances. But it sure is a lot more fun to think of these "robo
adviser" products as actual robots like this one or this one. Unless, of
course, you are a flesh-and-blood registered investment adviser, then you
probably think of scarier robots like this one and this one.
Either way you imagine them, these robots are swarming
into the industry. (Here's a good Peggy Collins piece that lays out how some of
the old guard in the industry like Vanguard and Charles Schwab Corp. are
jumping in the robo game.)
Their popularity is going to explode even more, if new
projections from consulting firm A.T. Kearney are in the right ballpark. Assets
under management by robo advisers are estimated to increase 68 percent annually
to about $2.2 trillion in five years, according to a forecast from the
firm. About half of that is expected to
come from money that's already invested
and the rest from non-invested assets.
Here's how A.T. Kearney explained what robo advisers are
to 4,000 Americans in a survey:
"`Robo-advisors' were defined as providers that
offer automated, low-cost, investment advisory services through web-based
and/or mobile platforms. The service was explained to survey takers as follows:
once you enroll for the service, you enter your risk profile and, using
advanced algorithms, the platform offers alternative personalized investment
portfolios for you to choose from (this is different than investing in a mutual
funds or ETFs that are not personalized) and continues to rebalance your
portfolio as required. This is all done digitally (online or mobile), without
you having to talk to a live person."
That last clause "without you having to talk to a
live person" is pretty amusing. It makes you wonder how bad the jokes have
gotten among the armies of RIAs out there if not having to talk to them anymore
becomes a factor in investment decisions. Of course, like the robots that we've
empowered to build our cars and clean our floors, cheapness is often the most
important thing. From A.T. Kearney:
The robots may prove to be even better than humans at one
of the most important tasks required of an investment adviser: knowing how to
dodge taxes.
"The dramatic collapse of commission prices and the
rise of automation means that institutional-grade tax-loss harvesting is now
within the reach of all investors," reads a blog post from robo-adviser
pioneer Wealthfront, whose claim to fame is programming a robot with all the
wisdom of professor Burt Malkiel.
Like any new trend involving computers that scares the
bejeezus out of us older folks, we of course have the millennials to blame ...
er ... thank for the growth of robo advisers, according to the research firm
Hearts & Wallets, which attempted to, ahem,
assess "the robo phenomenon through the prism of trend-setting
Millennials."
“They’re less a
threat to the current businesses of traditional advisors, who for the most part
have happily ignored young and middle-aged investors to focus on Baby
Boomers," Laura Varas, a co-founder of the research firm, said in a
report. "Younger consumer
preferences will have an outsized impact on financial services as firms race to
respond to new trends."
All of this raises some important questions. Like, could
growth in robo advisers among the fattest part of the demographics curve lead
to more crowded trades and more tightly correlated markets? What are the implications for Uncle Sam from
robots armed with "institutional grade tax-loss harvesting"
strategies? Will the Florida conference circuit become filled with awkwardly
dancing robo advisers and robo sales traders in May and June? And will they
play hookie during the breakout sessions to go shoot a round of golf with
handicaps of approximately negative 40?
If we start seeing portfolios with 90 percent allocations
to the Robo-Stox Global Robotics & Automation Index ETF, we'll know
something went wrong.
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