Are we on the road to “Robo-geddon”?

The term “robo-advisor” is used in the media today as part of a wider financial technology (“fintech”) revolution that is changing the way Canadians – and the world – interact with the financial services industry.

But many people aren’t entirely sure what the word “robo-advisor” really means. And, more importantly, they want to know if it will indeed involve any of the droids from the Star Wars universe – including those all-important protocol droids.

Although no droids, cyborgs or other cool movie creatures have been deployed in their rollout (yet), robo-advisors are companies that produce investment portfolios built using algorithms and other technology to reflect the investment needs of retail investors. In most cases today, robo-advisors are deployed to manage the investment portfolios of investors with smaller amounts of money to invest and who prefer to keep their costs for investment management as low as possible.

As portfolios built by robo-advisors are not actively managed, the firms that own robo-advisors don’t have to pay live investment managers for the day-to-day research and other activities these individuals undertake to ensure adherence to their investors’ profiles or financial goals. Given this lack of active management, and the fact that these portfolios generally invest in exchange traded funds (“ETFs”) that simply shadow an index’s holdings, the costs for managing these portfolios are generally lower than the costs of active management. That said, some ETFs now use certain factors to weight index holdings differently in an effort to enhance returns, but their management fees are still generally lower than those of actively managed funds.

All that to say there is currently very little “advice” when it comes to “robo-advice.” In fact, they could be more accurately referred to as “robo-portfolios”, although that name is nowhere near as catchy.

Regardless, robo-advisors are growing in popularity in Canada and around the world, and they are here to stay. Although their name may still sound ominous, they are likely to evolve into a valuable, low-cost component of many individuals’ overall wealth management solutions, complementing the work of financial advisors.

Source: Oscar Williams-Grut, The hottest new buzzword in tech is robo-advice — here’s what it’s all about, http://uk.businessinsider.com/what-are-robo-advisors-robo-advice-2016-3

Next post: 8 Strategies to succeed on exam day