WALL­-E Street: The Rise of the Robo­-Advisor

From online dating to vacuuming our floors, we rely on robots and algorithms for everything these days. So why not wealth management?

Over the past few years, we’ve seen a huge rise in the number of assets being managed by so­-called ‘robo­-advisors’.

These companies use flashy terms like ‘Modern Portfolio Theory’ (MPT) and ‘Efficient Market Hypothesis’ (EMH) to construct an algorithm that—they claim—will provide the same return as a traditional financial advisor for a lot less money.

Think of it as ‘The Imitation Game’, except instead of defeating Nazis, these companies are out to slash high brokerage fees.

Of course, traditional financial investment advisors are lining up to denounce this shift. They argue that these algorithms will never be able to know you as a person and that all you’re paying for is a ‘cookie-cutter’ portfolio.

But these algorithms aren’t necessarily new to those that work on Wall Street. They’ve been using similar technology to provide investment plans for their clients for decades now. What these new companies are really doing is just cutting out the middleman.

So how does it work?

You go onto one of the various websites, answer some general questions about your financial situation and risk tolerance, and then the algorithm does the rest.

You never have to know what you’ve invested in. As the markets rise and fall, these companies claim that their algorithm will rebalance your portfolio and keep you on track of your financial goals.

It’s investing by numbers and you don’t even have to lift a crayon.

Sound good?

At Rubicoin, we prefer to let human beings to do their own investing.

Why?

Because hunch is something you can’t get from robo­-advisors. Having a hunch is the culmination of everything you’ve learned in your life brought down to one tiny moment. It’s something that simply cannot be codified into an algorithm.

Take Tesla, for example. A robo­-advisor might have once looked at a company like Tesla and dismissed it immediately as a bad investment. It’s burning through cash and not producing anywhere near the number of vehicles other automakers are.

However, if you looked at Tesla through human eyes, you might have seen a trend. You can see that this company is at the leading edge of a global shift towards autonomous driving, not to mention cleaner energy solutions. You can see that Elon Musk—the founder of Tesla, PayPal, and SpaceX—is a visionary that owns a significant portion of the company, so his interests are aligned with the shareholders.

Essentially, you can start to pick out the things that a robo-investing algorithm might miss.

ETFs

When you look past the sleek interface and technical jargon, you find that these robo-­advisors often rely entirely on Exchange­-Traded Funds (ETFs). These are like a basket of various stocks, bonds, and commodities linked to basically any market you can think of (technology, gold, Brazil, the S&P 500).

Proponents of ETFs would have you believe they’re a simple and cheap way to diversify your portfolio, particularly for first-time investors that don’t have the time or willingness to research the market. Indeed, ETFs do have their place in a diversified portfolio, allowing you invest in a wider trend with less risk.

However, you should be passionate about what you invest in and willing to stick with the companies through thick and thin. You can do that by buying one single share in a company that you believe in.

If your life is an autobiography, you don’t want a chapter to be “I bought an Exchange-­Traded Fund”. Instead, you should be looking for something like, “I bought one share in Nike 20 years ago, and that was the best damn thing I ever did, because I still have it, and now it’s worth thousands”.

That’s a story.

Besides, the kind of person who starts harping on about how an algorithm on a website got him invested in zinc futures is the kind of person that doesn’t get invited to many dinner parties.

There’s a good reason iRobot has sold millions of Roombas. It’s because vacuuming is boring. Investing is exciting, so leave the robots to do the chores and spend your time finding that one company that you believe will be the next big thing.

 

 

 

Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this article.

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