Robo Advisors and their Impact in Traditional Banking

Robo Advisors  y su Impacto en la Banca Tradicional
10 de Jul, 2018 For a few years now, having a machine make our financial decisions is a reality that has been gaining ground in a landscape of broader opportunities for users that access these types of services. The method based on complex algorithms is easy to predict in some ways, since it requires knowing certain basic characteristics such as financial capabilities, investment history or experience, expectations and risk profile, by giving a test to the client to determine the way in which it should operate.

These innovative alternatives have increasingly taken advantage of technology, as well as cost reductions, to slowly take hold of investors, and today imply a clear threat to traditional banking in the form of the elimination of several investment barriers, which include the low quality of financial advice, high service fees and poor customer care of banking institutions.

By using a Robo Advisor, the client does not decide on whether to invest on one or another instrument in his portfolio, but instead gets protected from bad decisions, since the robot executes and makes decisions based on the characteristics of the human being that operates it. The client’s profile is therefore reflected on the robot’s online system to automate the execution. In addition, the profile is updated by the system itself, which translates into cost savings for the customer.

Due to the effect of compound interest, small cost savings translate into much higher profits in the long term. In general, Robo Advisors provide a very efficient service at a third of the cost, offering a higher profitability to the investor. Robo Advisors accomplish an asset distribution in which capital is invested at very low costs, with reassessments and new automatic proposals, based on the needs and psychology of each investor’s profile. In the case of inbestMe, they use sophisticated algorithms that calculate what the optimal recommended quarterly investment is for each client in a personalized manner (Vasileva, 2018). 
    
There are many aspects that add to the value of these technologies, in light of which we could define a Robo Advisor as an efficient, low-cost, automated portfolio manager (Aguadé, 2018) aimed at making investing a simple, cheap, and even fun activity for every investor. They do not depend on emotions, which means that the decisions they make do not depend on the doubts human beings may be subject to. They build a portfolio investment with ETFs or index funds while rebalancing, reinvesting dividends, etc., without us having to worry about this.

Traditional banking has been implementing strategies that are part of this competition with the intention of covering most sectors in the financial realm; however, these strategies have failed to prevent this new phenomenon from growing steadily, which can be evidenced by its impact in the United States, where it has gone from managing 2.3 to 20 billion dollars in the last four years. 

The future is still uncertain and impossible to foresee due to the many, diverse variables involved in the rise or stagnation of these new technologies. Furthermore, it is undeniable that one should take into account the difference between getting an automated customer service, or a person to whom you can ask questions and obtain answers that are not cold or automated. However, these new advisors are already on the right track to handle most assets in the world very soon, and it is certain that different players will try to implement actions that result in a competition, and in the creation of a more diversified market for this type of technology.

By Carlos Alberto Silvas Arvizu.

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