Technology has afforded plenty of opportunities to eliminate some of the human-error that's inevitable in various fields -- from medicine to manufacturing. So why not wealth management? With a new group of robo-advisers gaining ground, the future of investment planning could be upon us.
Elementary, my dear Watson
One of the factors limiting the use of computers and other technology for trading advice has been the need for qualitative analysis in addition to the vast amounts of quantitative analysis available to investors. Enter International Business Machines Corp.'s (NYSE:IBM) Watson computer.
As a learning computer, Watson is capable of understanding natural language, which often varies from person to person, providing responses and analysis from disparate information over a multitude of sources. Since appearing on Jeopardy! three years ago, Watson has increased its performance by 2,400%, making it a remarkable tool for the financial world.
In addition to offering cognitive computing to businesses, like Citigroup (NYSE:C) through its 2012 partnership, the IMB Watson Group has partnered with Singapore's DBS Bank, the country's largest lender, giving Watson the chance to prove its mettle by advising the bank's team of financial planners for its wealthiest clientele. The partnership is scheduled to begin during the second half of the year.
Beyond its ability to read millions of pages of financial data in just seconds, Watson is able to understand conversational data, such as a query from a customer that's not sure that they have enough money to begin investing. It's these types of interactions that may prove Watson's true value.
For some customers, the beginning of a relationship with a financial planner is the toughest, whether because of fear or self-consciousness. But with a computer, there's no fear of judgement. "Some people don't like to stop and ask for directions, but no one minds using a GPS," said John Gordon, vice president of the IBM Watson Group.
By allowing a prospective or new customer to pose the questions they would be hesitant to ask a human adviser, Watson and the other robo-centric planners may be able to reach a new market that's currently under-served. The super-computer is already working directly with customers through its partnerships with both the Royal Bank of Canada (TSX:RY) and Nielsen Holdings, so it's honing its skills for the masses.
Mind the gap
Watson isn't the only computer to get in on the action, several online financial advisers have sprung up that offer tech-based advising and management. Wealthfront, is the largest, having just surpassed the $500 million mark for its portfolio of assets under management. Both Betterment and Personal Capital Corp. are smaller with $360 million and $200 million in AUM, respectively.
While these robo-advisors don't have the name recognition that Watson enjoys, they are contributing some helpful analytics that could help dissuade their investors from bad behavior.
It's no secret that being emotional can interfere in investing, so the new firms have been focusing on way to help their clients avoid financially dangerous behaviors. On in particular has been the center of Betterment's study -- the behavior gap, which can cost you dearly.
By analyzing trades, timing, and behavior, Betterment has reported a 1.25% improvement in annual returns for its clientele over various behavior-gap studies. Through managed investment options, automated transactions, and no fees, Betterment has measured its clientele's annual behavior gap at 0.31% versus the 2007 Friesen & Sapp study average of 1.56% per year.
While the company's measurements are admittedly imprecise due to relying on only a handful of case studies, the reduction in negative behavior is not something to ignore. If using more technology can save investors time and money by negating typical human behavior, lots of people could benefit.
Who's really using this tech?
Even with advanced tech at their fingertips, the robo-advisors are admittedly serving a niche market -- for now. Wealthfront's COO Adam Nash noted that a disproportionate percentage of the company's clients come from Silicon Valley, with 55% falling in the under-35 age bracket.
For now, the younger generations may find the tech intriguing, and be more willing to participate in the new market. And that's not necessarily a bad thing for these firms, since their young clients will become the majority age demographic at a later date.
But for the older investors out there, don't fear. Though technology is playing a larger role in the financial market, even the top dogs at the robo-advisor firms recognize the need for human interaction. At the Las Vegas Money2020 convention, the participating CEOs all felt that money management in 2020 will still involve real, live human wealth managers.