Robots Can Probably Manage Your Finances Better Than You Can
A handful of entrepreneurs based out of the Bay Area are turning their eyes towards finance as the New Year approaches. They believe they may have hit on an incredible new way to manage one's cash and investments...and it involves robots. Well, sort of.
Entrepreneur Mike Sha is the founder of the San-Francisco based startup SigFig, which has constructed a website designed to automatically manage the financial portfolios of its users. Through the use of a number of complex algorithms, the site automatically searches out the lowest-fee funds. It automatically matches the risk of investments to the age of the user's age and their desired age of retirement, and it automatically balances and re-balances investments over time.
"It basically does everything a human financial advisor could do," explains Sha. But why turn to robots so suddenly? What makes algorithms and lines of code superior to a flesh-and-blood expert?
"Unfortunately, humans are expensive," he continues, "They can be prone to bias, based on how much or how little they get paid. Many are paid more based on the stocks of investments their clients buy, and the industry is riddled with conflicts of interest."
Humans are also capable of much less than machines.
"They don't scale well," continues Sha. "A person who is trying to manage money for a couple hundred people, they can't look at everyone's account all the time. If you could replace that human with a machine - which has been done in a lot of other industries to great success - you really can build a better, more scalable, lower-cost solution."
Indeed, low costs are central to the business model of SigFig, which charges a paltry $10/month for its management software. What's more, SigFig isn't the only startup going down this route. There's a host of other organizations, including Betterment and Wealthfront. Of these, the most fascinating might well be Wallet.AI.
"By living the way you are living, are you adding to your net worth everyday or are you subtracting from it?" asks Wallet.AI founder Boris Fedorov. "Are you becoming more cash-flow positive, or less?"
Fedorov, along with co-founder Omar Green, is attempting to create a product which will actively manage and monitor a user's finances, examining every one of their transactions and warning them whenever they start cutting into their net worth. By doing this, Fedorov explains, the product is able to offer its users unique insights into their finances, allowing them to save a mint.
"In October," says Fedorov, "a user started using the ride-sharing service Uber instead of cabs. Uber costs a fair bit more than a cab, and based on that insight, we were able to determine that they could have saved over $200 a month if, for every Uber trip they took, they took a cab instead."
It's a level of detail and commitment of which no human financial advisor would be capable. For a well-programmed computer or robot, however, such work is a walk in the park.
So...are human financial advisors next up on the chopping block for the robot revolution?
Maybe, maybe not.
"I think a lot of the services that are popping up are doing an amazing job with all of those things that can fit into an algorithm," notes Carl Richards, author of the Behavior Gap (a book about why people do stupid things with money). "The dilemma I have is what's going to happen when someone wants to do something stupid. The easy example would be selling out of the market when the market goes down."
"To me, it's the one spot where having somebody on the other end of the phone that knows you - your family, your values your goals - to walk you in off that ledge might be irreplaceable," he continues. While robots might conceivably be capable of warning users against selling during a market downturn, he feels that people might be far more willing to disregard the advice of a machine than they would an actual person.
So until robots and algorithms are able to bring that human element to the table, human advisors still have at least one thing going for them - empathy. That said, the price to receive sophisticated financial advice is, as a result of these new algorithms, dropping to an all-time low. As a result, the gates are being opened to a world which was once chiefly the domain of stockbrokers and analysts - both of which might need to get used to sharing their jobs with machines.