Financial market tests automated robo-advisers

Technology has come a long way in a very short amount of time, transforming with ever-accelerating speed the way we communicate, learn, shop, travel, work and gather information. Technology touches nearly every facet of our lives in more ways that we can possibly count, and finance and investing is no exception.

Evolving market

Real-time quotes for stocks, bonds, commodities and currencies from around the globe are available on our phones today; a physical place where buyers and sellers of stock met to hash out prices and trades, how we get the very name stock market, seems rather antiquated now, doesn't it?

As we speak, financial service firms are adopting new technologies to increase their efficiency and increase the satisfaction of their customers. Continuing advances in technology will allow the financial services industry to deploy increasingly complex, powerful analytics to help themselves and their clients make better informed investing decisions.

Traditionally, investors had two choices when it came to managing their portfolios: DIY or hire an adviser. Thanks to technology, there is a new option: robo-advisers. Yes, you read that correctly, robo-advisers. As in robot.

Enter the robo-adviser

Robo-advisers are automated financial advisers that provide portfolio management through the use of computers and algorithms with limited human intervention. The portfolios are constructed with low-cost, passive exchange-traded funds. Fees can be as low as 0.25 percent of the market value of the assets in the portfolio, a rate that compares favorably to the industry average range of 1 percent to 2 percent charged by human advisers. But what does the investor get for this low-priced, software-powered adviser?

Automated investment service providers, the more formal designation for these systems, require new customers to select an asset allocation, the percentage of the investor's money that will be invested in bonds and stocks. Once the split between stocks and bonds is selected by the customer, the robo-adviser does virtually everything else from investing to rebalancing to dividend reinvestment. Some of these new firms have even added tax-loss harvesting to their menu of services.

In infancy, but gaining traction

According to consulting firm Aite, as of last October there were 13 main players with about $4 billion in assets under management. To put that into perspective, Vanguard Group, the country's largest mutual fund company, manages about $3 trillion in assets. Clearly, robo-advisers are still in their infancy but mutual fund companies and investment managers are taking notice. Recently both Charles Schwab and Fidelity announced plan to offer robo-adviser services.

Heavy on robo, light on advice

Are advisers with a heartbeat concerned about competition from advisers with an algorithm? Not terribly so, at least not yet. The single most important service that a financial adviser provides an investor is advice — on just about any issue with financial ramifications that life can throw at you. Which can be a lot.

Meanwhile, the robo-adviser's fee covers the cost of constructing a portfolio based upon a few inputs and, so far at least, that's where its responsibilities end. While most of us don't mind answering a few questions online that help us create a new music-streaming station or purchase a new gadget, few of us would entrust our entire financial future to a similar process.

Living, breathing financial advisers — the good ones — are skilled at changing investment portfolios when a client's life changes, as it inevitably will with career moves, marriage, children, college tuition, divorce, grandchildren and retirement, to name a few life events. Human advisers are there to talk to clients when reassurance about staying the course, or altering the course, is needed during difficult markets.

It would be easy to delete an email alert from your robo-adviser, but a phone call from your financial adviser isn't so easily ignored. And for good reason.

The problem with personal finance is that the finance is just so personal, and that's why the best financial advisers have a knack for both.

Phoebe Venable, chartered financial analyst, is President & COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.

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