Financial Robo-advisors Cannot Replace Humans

Financial Robo-advisors

Last year we saw the rise of numerous robo-advisors, bots, and investing robots that are considered a disruptive force within the financial industry. All the media hype aside, these tools have a long way to go before they could be considered a replacement for human-made investment decisions.

The online universe is now full of robo-advisors and bots that run in the cloud or on specific websites, providing services ranging from simple investment advice to portfolio management. Estimations are that robo-advisors have managed about $15 billion in financial assets by end-2015. On the other hand, investment banks like Charles Schwab, Morgan Stanley, Goldman Sachs, and Deutsche Bank manage investment funds that are in the range of trillions of dollars. Most of them rely heavily on human-made investment decisions that are based upon the use of software but not on robo-advisors or artificial intelligence.

Differentiating between a robo-advisor and financial bot or chatbot

Of course, we must differentiate between a robo-advisor and financial bot or chatbot. The latter are software designed to understand natural language and perform simple actions like transferring money between your accounts. Robo-advisors, for their part, are more sophisticated tools intended to provide financial and investment advice or even trade financial assets on your behalf. Nonetheless, they lack the real artificial intelligence to make decisions instead of you and outside their programmed actions. Thus, you should take with a pinch of salt the claims of pundits that say robo-advisors will disrupt the entire financial industry, running in the cloud and providing financial guidance for everyone.

Sure, a robo-advisor can easily spot trading signals its creators have coded into it – buy and sell, high and low, etc. but it lacks the logic and the impulsive behavior of people. All financial markets are driven largely by the market mood i.e. rumors about a certain corporation or pending decision of the Federal Reserve. A robot cannot understand rumors even if it has been developed to understand natural language to a certain degree. No software developer is currently able to design a robo-advisor that could digest a rumor like… “Yesterday, the president of XYZ Inc. was caught with his lassie…” A trader on the floor of NYSE will immediately deduct that shareholder who will not be happy. How will a robo-advisor act in such a situation is still a mystery.

Yes, a robo-advisor or a bot can be very useful in automated trading based on trading signals. Can such a tool develop an investment strategy, though? No way, at least for the foreseeable future. MyKAI by Kasisto is a mix of robo-advisor and chatbot that got much attention recently but it is not able to handle complex banking and finance transactions, too. It can learn based on user actions and transactions history but in fact it replaces a personal visit to your bank being unable to develop and perform a complex financial strategy.

Combining both Robo-advisors & Humans

You cannot rely on a robo-advisor to take strategic decisions about investments, transactions, or business development. However, you can rely on chatbots and robo-advisors to perform basic support and maintenance actions and take care of your financial accounts. For good or for bad, you should still consult with a human about your investments or make any strategic financial decision yourself.

By Kiril Kirilov

Wasabi

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