Robo - Advisors are Humans too

Michael Williams, CFA, RBC InvestEase, Director, Portfolio Advice

Michael Williams, CFA, RBC InvestEase, Director, Portfolio Advice

The robo-advisor industry emerged following the 2008 Global Financial Crisis and has grown significantly over the last 15 years – projected to reach USD 2.76tn in assets under management (AUM) worldwide in 2023.

Simply put, a robo-advisor is a digital investment service that uses technology to keep costs low for investors, enables access to professionally managed investment solutions, and in some cases, like with RBC InvestEase, also enables access to human advisors.

Although the industry has been around for over a decade, it remains largely misunderstood. Even the term “robo-advisor” implies a machine with no human interaction. While this may be partially true, robo-advisors are still designed and actively managed by human experts. So how does it work, and where are the humans?

Firstly, the Algorithm.

The algorithm refers to the system used to determine the recommended investment portfolio and how that portfolio is managed over time. And no, this isn’t some real-world version of Terminator where an evil robotic generation is born out of Skynet.

At RBC InvestEase, for example, to get a recommendation, investors typically start by answering a few questions that help us get to know them. There are three primary factors we consider when providing an investment recommendation:

- how much time you have to keep your money invested

- how you feel about the ups and downs of the market (your willingness to take risk)

- your financial ability to withstand the ups and downs (your capacity to take risk).

A scoring system designed by human experts assesses your answers and provides investors with a portfolio recommendation best suited to help you reach your goals.

“Investors using robo-advisors often feel like they are giving away control of their investments to a machine. Instead, think of it like using a tour guide to set up your own visit to a destination.”

Every client’s portfolio recommendation is reviewed by our dedicated team of(human) Portfolio Advisors.Once an account is opened, we use technology to constantly monitor every account to ensure our client’s investments remain suitable to the information they’ve provided to us. When they don’t, our Portfolio Advisors make trades withinthe account to bring the investments back to the plan that is appropriate for the client.

Secondly, Human Advice.

Investing is emotional (as much as we may believe otherwise) and therefore is prone to bias and often rash decision-making. Thus, having an expert advisor can help clients understand and navigate a confusing market environment and ensure that their investments are being managed in a way that will help them achieve their financial goals.

Typically,robo-advisors will have a team of human experts available to investors when they need advice. 2022 was a year where investors experienced pretty significant volatility andclearly demonstrated how access to these advisors helped investors remain committed to their investment plan. This is important during similar times of volatility. Think of it like speaking to a professional trainer or dietician when you may be tempted to deviate from your healthier lifestyle.

Finally, Control.

Investors using robo-advisors often feel like they are giving away control of their investments to a machine. Instead, think of it like using a tour guide to set up your own visit to a destination. A tour guide can recommend certain attractions to check out and provide information on the history and culture of the place you want to visit. Still, you as the tourist retain control over the purpose of the trip and how to spend your time.

Similarly, a robo-advisor can recommend specific investment opportunities. Still, the client controls their investment goals and how much to invest. With an investment service like RBC InvestEase, clients get the benefits of both the “robo” and the expertise of a human “advisor.”

As technology progresses, robo-advisors can use these advancements to deliver a more personalized and efficient service to their clients. At the same time, the expertise of those who manage these platforms and provide advice will continue to play a crucial role in ensuring that clients receive relevant advice.

Financial