Can Robots Replace Your Personal Financial Advisor?

April 30, 2018

The robots are rising, and they are trying to put money in your pockets.

In March 2016, investment banking firm Goldman Sachs made a very interesting acquisition that hints at the future of investment advice. Honest Dollar, a small tech startup based in Texas, is now part of Goldman Sachs. What this firm provides is a futuristic service that allows individuals to choose from three retirement plans that they can sign up for online. The investment aspect of these plans is automated and handled by algorithms that choose the instruments that fit the financial goals of account holders.


Honest Dollar is one of many tech firms dedicated to the automation of personal finance. Computer aided investing applications are nothing new; software services that engaged in pattern recognition and sent signals to traders were introduced in the 1990s, and robo-trading is a strategy that has been used by Wall Street firms and individual traders since the early 21st century. The combination of programmatic algorithms and artificial intelligence is currently in use by investment banking firms around the world; until recently, however, this type of automation has mostly stayed out of personal finance.

How Robotic Financial Advisors Work


Robo-advisors are essentially software applications that are coded with some of the knowledge and functionality of personal financial advisors.


Robo-advisors are different from robo-traders in the sense that their primary goal is not to execute trades based on market patterns. Like their human counterparts, robo-advisors collect information from clients to prepare advice that matches personal financial goals, investment horizons and risk tolerance levels.


Aside from giving advice, robo-advisors can guide and assist clients in funding and managing their accounts. The investment choices are largely made by the clients, but robo-advisors can also execute trades to some extent. One standard feature offered by all robo-advisors is a comprehensive portfolio snapshot and analysis as well as alerts to let clients know about investment opportunities or warnings about the performance of instruments such as stocks and bonds.


A Robo-Advisor Example


Someone who wishes to get financial help can get started with a mobile app like Stash Invest, which does not actually execute trades but offers plenty of options within the financial parameters and investment profile of clients. As of 2016, the Stash app boasted 50,000 account holders who invested as little as $5 to get started.


Stash clients open their accounts by providing answers to a set of questions that serves to establish the risk tolerance level. This app encourages clients to save by linking a bank account that will allow them to make periodic electronic transfers to their investment portfolio. There is a bit of friendly innovation in the form of investment themes that have catchy nicknames; for example, aggressive investors with disposable income may be offered the “Internet Giants” theme while others who are interested in blue chip stocks may be interested in the “Delicious Dividend” theme option.


As can be expected with modern apps, Stash includes social media features; nevertheless, there is a limit as to how much personal and portfolio information can be shared.


Robo-advisors are more adequate for investors whose net worth is less than $500,000. There is a certain level of sophistication that these software applications have yet to reach, and they are not quite ready to replace personal financial advisors and wealth management experts.