From Robinhood to Acorns, many Americans are turning away from traditional financial advisors and instead using “robo advisers,” or automated investment platforms. With low fees and additional control, these new platforms are compelling. But there’s a catch, too: investing without any type of guidance can be dangerous for new investors.
Let’s take a closer look at this new phenomenon, and why more and more investors in America are ditching tradition for convenience.
The Rise of the Robo Adviser
Robo advisors have risen in popularity as AI and machine learning technology has become more popular. These advisors are programmed to select investments automatically based on directives placed by the investor. In an ideal world, this allows the investor to follow their own, personally designed trading strategy, while avoiding any type of emotional investing.
With robo advisers becoming more accessible, they’ve become a popular way for many Americans to start testing out their own investment strategies. Rather than working through a traditional brokerage firm, would-be investors are instead downloading apps, funding them with a few dollars, and getting started. Some apps allow investors to trade portions of stock rather than whole stock, to keep their costs down. Others allow trading on margin.
Americans Strive for More Control Over their Finances
Even larger banks, such as JP Morgan, are now launching their own direct, digital investment services. In JP Morgan’s case, the robo adviser will specialize in ETFs — a low risk form of investment that JP Morgan is interested in promoting.
Apps are now being used to control every aspect of an individual’s life. Today, many can unlock their phone and control the temperature in their house and the camera and lights in their garage. They can check their work schedule and set up doctor’s appointments.
Americans are interested in bringing that type of functionality to finance. Online banking has become ubiquitous, and now online investing is becoming equally popular. Individuals want to be able to easily and frequently check on the performance of their accounts.
Perhaps this is also because Americans in general are also becoming more cost-conscious. As the economy fluctuates, many are prioritizing saving and building up retirement funds.
The Advantages of a Robo Adviser
Robo advisers are becoming popular not only due to their accessibility, but because (when used right) they work remarkably well. Robo advisers:
- Have extremely low fees compared to traditional advisers. In a world of compounding interest, that matters a lot more.
- Have extremely advanced algorithms. Robo advisers tend to be extremely accurate in their predictions. They use the best strategies from the best investors, but with complete consistency.
- Have almost no barrier to entry. Anyone can start investing right away, and often there’s no minimum (or a very low minimum). Comparatively, many mutual funds and other investments require at least a few thousand to get started.
With these advantages in mind, it’s easy to see why many people are choosing robo advisers. Many people don’t have a lot to invest, but they want to get started now, and they don’t want to pay a significant amount of fees.
The Dangers Associated With Robo Advisers
Robo advisers aren’t inherently dangerous, but their accessibility can be. These new online platforms make it trivial for investors to load their money into the account and, well, promptly lose it. If someone isn’t careful, they could lose their entire investment account.
This is especially true because not all investment apps provide robo advisers. Some let you trade on your own. And if you trade manually on margin, you could quickly lose your entire investment account.
Most app-based investment accounts can be opened by just answering a few, self-reported questions regarding an individual’s financial acumen. An individual can easily claim to be highly experienced in trading even if they aren’t, and they might even believe the answer they’re reporting.
With any investment comes risk. An accessible investment account carries risk to everyone.
In the past, most people invested their money through a financial services professional, who told them how much money they should be saving to remain on target, and advised them regarding the right investments for their risk tolerance. Today, all of this is being taken up by AI applications, and it’s easy for new investors to make significant mistakes.
Whatever the potential dangers, it’s clear that robo advisers provide an easy way for beginners to start investing their money now. And it’s likely that big banks are going to start providing additional app-based and AI-based investment products moving forward.