Why automated investing?
There are many reasons that led to the creation of “robo advisors.” It was a culmination of all of the reasons below that led to the robo revolution. And the best part? It is better for you, the consumer.
1. Lack of options for the general investor
The average investor has less options available to them for investing than does someone who has accumulated great wealth. Wealth begets wealth as investing is one way to create long-term wealth. With less options, it is more difficult for the average investor to increase their wealth. Many investment advisors and brokers have investment minimums and if your investible assets fall below that, you cannot invest with them. Why? Many professionals would rather focus on one “large fish” instead of many “smaller fish.” It is simply more profitable and often less time intensive.
2. High fees
Fees, fees, fees. High cost of investing has been one of the biggest issues with the financial industry. Unlike many tangible items such as a cup of coffee or a new pair of shoes, fees within the investment industry are much more complex and vague. And, it’s intended to be that way! Brokers, investment advisors, platforms, and banks are all making money off of your lack of knowledge.
Consumers know how much a cup of coffee costs and can compare shoe prices over the internet. It is much more difficult to know what you are truly paying for investment advice. You could be paying a percentage of asset value each year or you could be paying a brokerage commission per trade. Regardless, these fees aren’t usually broadcast on a speaker system or over the internet. Good luck shopping around and checking out your options.
Furthermore, the fees discussed above can be exceedingly high and can suck away a large amount of your hard-earned money over time. (INSERT GRAPH OF FEES OVER THE INDUSTRY)
Low cost mutual funds were the next step in the right direction followed by the invention of passive ETF’s. Layer on some algorithms regarding financial theory to give you an “optimal portfolio” created just for you and voila, the robo advisor was born.
3. The growing need for investing
The falling use of pension funds in the private sector has left a major gap in the marketplace. Furthermore, the lack of knowledge by the general populous compounded by the lack of education from the school system has left the average individual ill-prepared to save properly for their future including saving for a house, children’s education, and most importantly, retirement.
There is a continually growing need for active investments for the mass market. The robo advisor industry is certainly working to fill that gap.
4. Growth in ETF’s
None of this would be possible without the invention of ETF’s. ETF’s stand for Exchange Traded Funds. These funds consist of a basket of investments (stocks, bonds, commodities, etc.) that gives you exposure to multiple investments at once. Furthermore, they are very liquid, meaning they trade throughout the day for a very accurate real-time price and usually carry very low fee structures. This invention allows you to invest in an “Optimal Portfolio” (more on that here), based on economic theory, at a very low cost. Basically, you can invest in what is deemed to be the best mix of assets possible: the highest return potential for the lowest risk, at a very low cost.
5. Computing power and the internet
Much like other industries have changed and evolved as the internet has grown, so to has investing. The internet is needed to provide this low-cost investment option as human contact is minimal when investing with a robo-advisor. The lack of human contact is why it is so cheap. Further, the internet allows these businesses to reach many customers and gain scale, something that is crucial when catering to the mass market. Remember, a 2% fee on a several million dollar portfolio is a lot of money. But, 0.2% on a $10,000 portfolio is much much smaller. To make up that difference and create a profitable business, robo advisors need to attain many more clients. Ever wonder why most investment firms have minimum requirements? This exercise is why. They can be profitable with just a few clients. However, the internet has leveled the playing field and made low-cost, mass market investments possible.
6. An inefficient market
Lastly, the financial industry is very inefficient. There are thousands of investment firms and countless investing strategies. Wading through all the noise to try and find a good firm to take care of your money is extremely difficult. Firms with poor financial results as well as high fees can stay in business for many years as consumers simply don’t know enough to find the most efficient place to invest. You could easily be at an underperforming wealth manager now and not even know it. Finance has historically been a relationship business, and these relationships remain very important. Unfortunately, consumers place too much importance on these relationships and it may be hurting them in their pocketbooks.
When you put all of the points above together, you have the perfect storm brewing to shake up the financial industry. Here at RoboRiches, we advocate the growth of robo advisors. Learn more about this potential investment at Robo 101 and see what options are available to you at The List.
Check out more articles written about robo advisors in our archives.
There are many roboadvisors to choose from; each with distinct characteristics and a wide variety of services offered. We break down the similarities and differences between these firms here at The List.