In the investment industry, “robo-advisors” such as Wealthfront and Betterment are gaining popularity in the North America as AI capabilities are utilised to analyse and understand how account holders spend, invest, and make financial decisions, so they can customise the advice they give their customers. In addition, the world’s first AI managed fund – Active A.I. Global Equity ETF was launched on 1st November 2017 in Canada. For the past eight months since its launch, the AI fund’s performance was quite stable with price volatility of 8% while the S&P 500 index had a volatility of 11% during the same period.
So, will these so-called “Robo Advisors” eventually replace all human financial planners?
The robo-advisor’s overriding assertion is that each company’s proprietary algorithm claims to take the emotion out of investing and will grant the investor better returns for a lower cost than traditional financial planners.
Artificial Intelligence is utilised to help manage and augment rules and trading decisions, helping process the data and create the algorithms managing trading rules. Investment firms have implemented trading algorithms based on sentiment and insights from social media and other public data sources for years. For example, Nomura Securities rely on AI robo-traders for high-frequency trading to boost profits.
Despite the benefits of robo-advisors, the main drawback is that robo-advisors do not provide investment advice that is necessary in the customer’s best interest, nor are they free from conflict of interest. For example, an automated investment tool may not assess all of the client’s particular circumstances, such as the client’s financial situation and needs, investment experience, other assets type’s holdings, tax situation, need for cash, and other intangible aspects of the clients.
Holistic Financial Planning
The idea of robo-advisors is appealing to the younger generation with low account balance, and its low fees due to standard investment models that take advantage of low management fees with exchange-traded funds (ETF). However, robo-advisors cannot provide holistic and customised solution to clients. In Malaysia, licensed financial planners offer holistic financial planning services to clients that include: insurance planning, tax planning, estate planning and retirement planning. Licensed financial planners often do detail clients’ fact finding to understand clients better. Whereas robo-advisors do not ask about assets outside the investment account and other debt liabilities and these information about the clients are important towards attitude towards risk.
Despite the popularity of robo-advisors, statistic shows that: “Traditional advisors are nearly two times more prevalent amongst the millennials than robo-advisors” as people realise that robo-advisors only have one job which is to use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. Hence, people still prefer to work with licensed financial planners face-to-face as they know their trust worthy financial planners will give the best financial advice to them.
This article is a community message by Financial Planning Association of Malaysia (FPAM), Johor Chapter (www.fpam.org.my). FPAM is a non-profit organisation which holds the licencing mark for CFPCERT TM Certification Programme in Malaysia. If you need more information on financial literacy, please email: [email protected]