Are Financial Advisors Being Squeezed Out By Algorithms?

As the use of tech in investments increases, is there a need for advisors?


Technology has allowed us to do things previously thought impossible.

From the ability to soar above the clouds to simply being able to add millions of numbers together in seconds, few would argue that it hasn’t had a positive impact on society in general.

In some cases though, we have seen that people have turned against new technology when it means that people lose their jobs as they are replaced by machines. This has seen some backlash, especially in jobs that rely more heavily on manual labour, with manufacturing being hit especially hard.

What people did not envision was that other more desk based work that always used a high level of technology may go the same way.

This is currently happening in the financial world that may be changing this though.

As the baby boom generation are retiring, we are seeing the people want to have a way of investing that is more in tune with how they approach the rest of their life, through technology.

This has led to companies like Wealthfront, Betterment and FutureAdvisor, who offer investment algorithms, moving people away from traditional financial advisors to more technologically based solutions.

The basis of their model is by using algorithms to create investment portfolios based around the needs of the customers and the classifications of the companies invested in, they can safely make sound investments.

A model like this appeals to the younger generation, who are both cash poor (many fear that the current generation may be ‘lost’ due to credit issues and wealth distribution) and tech savvy. Many people in the younger generations are also wary of those working in the financial sector due to the media perception of them following the credit crisis in the late 2000’s, meaning that they would rather trust their money to a computer system than a person.

The difficulty of these systems in relation to overall financial success is not that they are not effective, but they are limited to how they can analyze and not pick up the subtleties that humans may be able to pick up. This could be from rumours of irregularities or impending problems that could have an impact on what may have been considered as a safe investment.

However, as we have seen with multiple other systems throughout several industries, the ability to disseminate information from multiple sources, including sentiment and web analysis, will mean that these systems will certainly have the capability to make these kinds of nuanced decisions.

Presently, it seems that these algorithms are based primarily on the market perception of stocks and shares, which may not always be the reality. A prime example of this is Enron from the 90’s who had one of the best stocks in the world, just before it plummeted to nothing and the company ceased to exist.

However, the information that was received by many financial advisors would be exactly the same as the information received by algorithms, meaning that questionable business practices would still throw off experienced advisors in the same way as any technology.

The truth is that the difference between the two investment approaches boils down to the individual. Some people prefer to do business with somebody directly, others would rather do it remotely through technology. It is for this reason, that although algorithms will undoubtedly increase in popularity amongst investors, it is unlikely to completely replace financial advisors at any point in the future.

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