22 April 2019
Bo Lu is the co-founder and chief executive of FutureAdvisor. Photos: YouTube, FutureAdvisor
Bo Lu is the co-founder and chief executive of FutureAdvisor. Photos: YouTube, FutureAdvisor

The emergence of robo-advisors in the financial world

Robots have been taking over many jobs in various industries, and now they are replacing human financial advisors.

In August one of the world’s largest investment management companies decided to acquire a robot financial advisory firm called FutureAdvisor, reportedly for US$200 million. The deal has sparked a revolution in the industry.

Typically robot advisors send out questionnaires to collect investors’ personal information, family income and expenses, investment target, risk appetite and capacity, then analyze the data to find the most appropriate investment portfolio for clients.

The automated financial advice platforms, for example, choose exchange-traded funds (ETFs) as an investment option to help clients cut the cost of management fees.

Meanwhile, as the robots can serve a large number of clients simultaneously, the economies of scale, which cut operational costs, will redound to the benefit of clients.

Those who cannot afford to hire human financial advisors can avail themselves of such automated services.

Robotic advisors are dominated by programs, and are based on data analysis, so they are absolutely rational and won’t be influenced by market emotions.

Human advisors may find it difficult to pick the right choices among thousands of financial products, and could make errors of judgement.

On the other hand, robots can process huge data sets at amazing speed fast and help diversify asset allocation. They can also make timely notices to clients about changes and returns of their portfolios.

Some skeptical investors say the programs are written by human beings, so there’s little difference between hiring real financial advisors and enlisting robotic ones.

They also say that computers are less flexible than human beings, especially in handling special cases.

Other investors may be worried about cyber security issues such as personal data leaks. 

Those problems are major obstacles for the industry and are not likely to be solved in the short term.

In the United States, several financial institutions have adopted such robotic services.

The FutureAdvisor deal reflects the financial industry’s belief in the promising outlook of the new business.

The business had zero assets in 2012. But, according to a Citibank study, assets allocated through robotic advisory services had reached about US$14 billion as of the end of 2014.

The same study projects the number to climb to US$5 trillion in a decade.

With the technologies becoming mature and problems being solved, robotic financial advisors will in no time pose a serious competition to their human counterparts.

This article appeared in the Hong Kong Economic Journal on Oct. 27.

Translation by Myssie You

[Chinese version中文版]

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Associate Director at Value Partners Limited

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