What Is A Robo Advisor? Hybrid vs AI vs Robo Advisors

What is a Robo Advisor? What Types of Robo Advisors Exist? Hybrid vs Artificial Intelligence - Learn All About Robo Advisors In Our Q&A Series

What Is A Robo Advisor?

Key Robo Advisor Questions & Answers
Key Robo Advisor Questions & Answers

A Robo Advisor is a digital application that offers users financial advice created by algorithms, artificial intelligence, or mathematical formulas.  The term Robo Advisor is short for robot advisor. However, the phrase Robo Advisor is inaccurate. To explain, a Robo Advisor is a digital construct, usually an algorithm or artificial intelligence (AI) rather than an actual robot.

However, the terms “robo” and “bot” are financial-industry slang terms for digital financial applications. For example, so-called trading robots or trade bots handle most of the trades on the world’s financial markets.

Interestingly, news reports indicate many financial industry professionals hate the terms “robo” and “bot.” However, those words are the standard industry technology for digital advisors at the present time.

The idea behind Robo Advisors is that software is more accurate, more honest, and less biased than human advisors. For instance, a Robo Advisor is not likely to receive a commission or kick-back on equities or securities it sells.

In addition, promoters claim Robo Advisors are less likely to make mistakes than people. Notably, algorithms are better at math than most humans.

Lastly, Robo Advisors are not going to suffer from the emotional decision making that most investors and traders try to battle against.

The History of Robo Advisors

The first known Robo Advisor was a semi-automated financial manager offered by Mint in 2006.  More sophisticated Robo Advisors appeared during the Great Financial Meltdown in 2008. In fact, Robo Advisors’ appearance resulted from the popular distrust of human financial advisors and investment bankers.

In 2010, John Stein launched Betterment, the first Robo Advisor marketed to the general public. Over the next few years traditional asset managers like Vanguard, Morgan Stanley, Charles Schwab, and JPMorgan Chase entered the Robo Advisor market.

By 2017 Robo Advisors were managing $200 billion in assets, Barrons estimates. Notably, Vanguard’s Personal Advisor Services was the largest Robo Advisor overseeing $101 billion in assets. Schwab is the second largest Robo Advisor managing $27 billion assets. In addition, government agencies like the Nevada State Treasurer are turning to Robo Advisors to manage public investments.

Moreover, some regulatory agencies like the Monetary Authority of Singapore are issuing licenses to Robot Advisors. Notably, the US Securities and Exchange Commission (SEC) grants them the same legal status as human financial advisors.

The amount of funds controlled by Robo Advisors is growing dramatically. In fact, Algonest estimates Robo Advisors worldwide could manage over $2 trillion in assets by 2020.

What Is An AI Robo Advisor?

AI Robo Advisors. Do They Really Work?
AI Robo Advisors. Do They Really Work?

New more sophisticated Robo Advisors that utilize artificial intelligence (AI) and machine learning to analyze investments are entering the market. Interestingly, some of these Robo Advisors will do far more than offer financial advice. Moreover, many new Robo Advisors are also smartphone apps.

For example, Numerai is trying to build an artificial intelligence hedge fund linked to a cryptocurrency called Numerarie. Meanwhile, creators envision an app called Daneel is as a combination Robo Advisor and personal assistant you can access through your phone.

Other mobile-robot advisors include Japan’s Theo, and Bamboo. In addition, companies like Infinity Partners are developing robot wealth managers for rich clients.

Will Artificial Intelligence (AI) Advisors Replace Robo Advisors?

Investment banks are working with artificial intelligence because Robo Advisors have been a hard sell to affluent clients. In fact, UBS sold its SmartWealth British robot advisor to a company called SigFig in 2018, Reuters reports. The Swiss bank sold SmartWealth because it was not making money.

Entrepreneurs like those behind Numerai, hope to succeed where UBS failed by building AI advisors that can do everything human investment bankers and fund managers can. In fact, the goal at companies like Numerai is to create an AI that manages money without human help. However, today’s AI advisors are far from achieving that goal. On the other hand, many organizations are trying to build AI advisors that “think” for themselves.

What Types Of Robo Advisors Are There?

Today there are many Robo Advisors on the market. Additionally, new Robo Advisors appear almost daily.  The most popular Robo Advisors are in the form of simple investment apps like Vanguard’s Personal Advisor Services. In detail, these simple investment apps manage accounts and make trades under specific conditions. For instance, an investment app could sell a stock if its price earnings ratio (PE Ratio) is too high.

Automatic investment apps like M1 and Robin Hood offer instant low-cost access to investment markets. For instance, M1 allows users to pick their own stocks or ETFs or access to 80 managed portfolios.

Meanwhile, artificial intelligence powered apps; like Numerai and Sharpe Capital, use cutting edge mechanisms like machine learning and prediction markets to make complex decisions. For instance, Numerai will try to predict market outcomes and bet against the markets.

In addition, next-generation Robo Advisors are controlling hedge funds, mutual funds, and even bank accounts. Hence, Robo Advisors could soon manage your money and offer financial advice.

Hybrid Robo Advisor Is A Mix Of Human & Machine Advice
Hybrid Robo Advisor Is A Mix Of Human & Machine Advice

What Is A Hybrid Robo Advisor?

A hybrid Robo Advisor combines a digital algorithm with a human investment advisor. To explain, the idea is to add a human touch to robo investing.

The hybrid Robo Advisors exist because many customers will feel better if there is a person to talk to. In addition, some people are uncomfortable with machines managing their finances.

Specifically, the average Robo Advisor combines a standard package of algorithms with a person. In fact, the robot advisor will handle most of the investment chores. However, customers can talk to a human whenever they want to.

An obvious use for hybrids is to get people comfortable with Robo Advisors. Asset managers often use hybrid advisors to deal with older customers and people who know little of finance.

How Do Hybrid Robo Advisors Work?

A human financial advisor could recommend Robo Advisors or algorithms to customers. Additionally, the human advisor could interview a customer and decide which Robo Advisor is right for her.

Interestingly, hybrid financial advisors are becoming popular. Notably, an Accenture survey estimates 68% of affluent investors prefer hybrid advisors, Investment News reports. Moreover, hybrid advisors could manage 10% of the investment wealth in the United States by 2020, MyPrivateBanking claims.

Under those circumstances, hybrid advisors could be the future of wealth management in the United States. An obvious advantage to hybrids is that they will enable human financial advisors to keep their jobs.

On the other hand, some investors could be more comfortable with Robo Advisors rather than human financial advisors. To clarify, many people distrust financial advisors because they view them as salespeople.

Moreover, younger people who grew up playing video games, surfing the internet and using apps could prefer Robo Advisors. In particular, people under 35 could view a Robo Advisor as simply another useful app rather than a threat.

Hybrid Advisors vs. Robo Advisors

Hybrid vs Robo Advisors
Hybrid vs Robo Advisors

In fact, some wealth management firms like Wealthfront refuse to use human financial professionals. Instead, Wealthfront uses algorithms and bots for everything. For example, Wealthfront advertises Automated Financial Management.

However, traditional investment firms like Morgan Stanley and mutual fund managers like Vanguard prefer hybrid advisors. Such organizations use hybrids because they work with customers of all ages and backgrounds.

Notably, those unfamiliar with the financial markets and investing are less trusting of innovations like Robo Advisors.  However, Robo Advisors are more efficient and work better with large numbers of customers.

Strangely, Robo Advisors can provide a higher level of customer service. For instance, Robo Advisors can instantly respond to phone calls, and emails and operate 24 hours a day seven days a week. In addition, a Robo Advisor can instantly fulfill simple requests such as selling or buying equities or providing a balance.

Finally, smartphones and the internet can provide instant connectivity to Robo Advisors. Thus, Robo Advisors are perfect for people who want constant control over their investments.

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List of Robo Advisors 2019 – Advantages, Disadvantages & Fees

Robo Advisor NameProsConsAnnual % Fee AUM FromPerformance DetailsPerformance Rating
Emperor Invests★ Offers pure equity investing. Thus no funds or ETFs offered
★ Offers direct stock investing - you own the stock
★ Option for dividend re-balancing available.
★ Harvests All Dividends
★ Higher than average annual fee
★ Hybrid - Machine plus human research
★ $2000 minimum balance
★ Tailored portfolios available.
✘ No Tax Loss Harvesting Yet.
✘ No ETFs or mutual funds available.
✘ No details of security arrangements available.
0.60%Emperor claims to average 16.85% over last 11 years vs S&P 500 7.62%★★★★★
M1 Finance★ Commission Free automated investing.
★ Allows you to buy fractional shares of any stock or fund.
★ American accounts are insured up to $250,000 by Federal Deposit Insurance Corporation.
★ M1 Securities are insured for up to $500,000 by SIPC.
★ Military grade 4096-bit encryption and two-factor authentication for security.
★ Offers lines of credit.
★ Low minimum accounts balance of $500.
✘ Focused on US customers Only.
✘ No hybrid advisors available.
✘ Minimum balance of $10,000 for some services including lending.
0%M1 claims its funds offer a 9.87% rate of return. Typically within 2% of the comparative benchmark★★★★
Betterment★ Offers hybrid advisor services.
★ No minimum investment needed.
★ Offers a variety of products including Trust Accounts.
★ Special services like tax-loss harvesting and socially responsible investing available.
★ Focused on smaller investors.
★ Focuses on retirement.
✘ Focuses on index funds rather than individual stocks.
✘ Could place some serious limits on investor choices and behavior.
✘ Claims to use “guardrails” to protect investors from themselves.
✘ No details of security arrangements available.
0.25%Betterment claims it offers 5% higher returns than the average US investor receives.★★★★
 Wealthfront★ Offers free financial planning.
★ Easy to Use App
★ Allows Passive Investing
★ Offers tax-loss harvesting and other loss-mitigation strategies.
★ One low fee.
★ Low $500 minimum investment required.
✘ No hybrid advisors available.
✘ No human financial planning advice available.
✘ Completely automated strategies.
✘ No details of security arrangements available.
0.25% Typically 1% lower than comparative Benchmark★★★★
Vanguard Personal Advisor Services★ Offers both hybrid investors and robo advisors.
★ Clear fee schedule
★ Custom Financial Plans available.
★ Low Fees
★ Phone support available to US customers.
✘ $50,000 minimum investment required.
✘ Charges higher than average fees.
✘ Owned by a mutual-fund operator. So Vanguard has an incentive to push mutual funds.
✘ No details of security arrangements available.
0.30% + Fund FeesDepends on the funds. However, Vanguard’ claims its US stock funds offer a 7.51% rate of return - in line with S&P 500 avg returns
★★★★
Schwab Intelligent Portfolios★ No advisory fee and commissions on some accounts.
★ Hybrid advisors available.
★ A portion of the funds is held in an FDIC insured account at Schwab Bank.
★ A variety of accounts including IRAs, custodial accounts and trust accounts are available.
★ Schwab claims its robo advisor can automatically re-balance accounts to lower risks.
✘ $5,000 minimum investment required.
✘ Tax-loss harvesting only available on portfolios over $50,000.
✘ Schwab admits to making money off sales ETFs and other investment products.
✘ No details of security arrangements available.
ETF FeesNo comparison to the S&P available because of the variety of portfolios offered.Not Available
Fidelity Go★ No Minimum balance required to open accounts.
★ Hybrid advisor services available.
★ Open to any US resident over 18 years of age.
★ Fidelity will offset some additional fees with a variable fee credit.
★ You can start investing with as little $10.
✘ Higher than average fees.
✘ The day-to-day investment trading decisions are made by 3rd party "Strategic Advisors LLC"
✘ May automatically invest in fee charging accounts like the Fidelity Government Reserves Fund.
✘ No banking services available.
✘ No details of security arrangements available.
0.35% + Fund FeesNo comparison to the S&P available because of the variety of portfolios offered.Not Available
TD Ameritrade Essential Portfolios★ Hybrid advisors available through professional Portfolio Management.
★ Socially aware investing available.
★ Personalized portfolios available.
★ Free tax-loss harvesting on all accounts.
✘ $5,000 minimum deposit required.
✘ No banking services or insured accounts available.
✘ No details of security arrangements available.
0.30%No comparison to the S&P available because of the variety of portfolios offered.Not Available
Ellevest ★ $0 Minimum investment
★ Claims to be designed by women for women.
★ Female CEO Sallie Krawcheck
★ Claims investment algorithms are designed for women.
★ No penalty for withdrawals.
★ Offers algorithms that are supposedly tailored for a customer’s salary, gender, and lifespan.
★ Some hybrid services available on all accounts.
★ Private wealth management services available.
✘ Charges additional fees for hybrid advisory services.
✘ It is not clear if tax-loss harvesting is available.
✘ No details of security arrangements available.
✘ Does not reveal the actual costs of the private wealth management services.
0.25%No comparison to the S&P available because of the variety of portfolios offered.Not Available
Robinhood★ Offers cryptocurrency investment.
★ Offers option and ETF investment.
★ Claims to be commission free.
★ Offers Stock Investment.
★ No minimum investment required.
✘ No hybrid advisors offered.
✘ No details of security arrangements available.
✘ Robinhood shut down its cash management services in 2018 after critisicm accounts were not insured.
✘ Serious lack of transparency.
✘ Claims cash management services are coming soon
0%No comparison to the S&P available because of the variety of portfolios offered.Not Available
Morgan Stanley Access Investing★ Offers a detailed investment plan.
★ Bases portfolios on an investors’ risk tolerance.
★ Algorithm runs thousands of simulations to forecast portfolio performance.
★ Hybrid advisors available.
✘ Higher than average fee.
✘ $5,000 minimum investment required.
✘ Simulations could offer unrealistic pictures of market performance
✘ No details of security arrangements available.
0.35%No comparison to the S&P available because of the variety of portfolios offered.Not Available
Table 1. List of Robo Advisors 2019 - Advantages, Disadvantages & Fees

Note: there are many other Robo Advisors out there and more coming online every day. Hence, it is always a good idea to shop around.

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