If we were to picture a modern trader, the image would be dramatically different compared to about twenty years ago. For the previous generation, the landscape had nowhere near as many tools as it does today, and it was nearly impossible to become a successful trader without a financial degree. Now, the average modern trader is a Millennial, trades cryptocurrencies, uses the latest flagship smartphone, and doesn’t have an academic background in finance. All of that was possible thanks to technology, which has not only influenced fields such as manufacturing and healthcare but trading as well.
We’re used to hearing about robots in an engineering or industrial context, but the reality is that robots are also present in financial markets and, even without knowing it, most traders now rely on them to execute successful trades.
Robo-advisors – the new way to invest
When thinking about the way technology has changed Forex trading, it would be hard to ignore the rise of robo-advisors. Although the first robo-advisor, Betterment, only launched in 2008, they have experienced a huge surge in popularity, and by now, most traders have already used one.
At first, the technology behind these robots was quite basic and was based on the automated portfolio allocation services that people were already using since the early 2000s. They were also only accessible to human wealth managers, so unless you hired someone to use the software for you, you couldn’t have access to it. Now, however, everyone can use them, and the list of things that robo-advisors can do has expanded considerably. Robo-advisors need little to no human supervision, and they provide automated, algorithm-driven financial planning services. They can also collect data about the user’s financial situation and goals from online surveys, and then they use this data to provide customized advice and even invest client assets automatically. The list of services continues with portfolio management, optimization of passive indexing strategies, and optimized portfolios for socially responsible investing and Hallal investing. Robo-advisors can also offer tactical strategies that mimic hedge funds.
Contrary to common belief, robo-advisors aren’t very expensive, and one of the reasons why so many beginners start trading is that they have this option. Worldwide, the robo-advisor market is on track to hit $2 trillion in 2020 and $7 trillion by 2025.
The rise of robo-advisors goes hand in hand with the meteoric rise of fintech, which has changed the way people perceive financial services and manage their income. For example, robo-advisors help users rebalance their portfolio and build passive indexed portfolios. Thanks to the latest advancements in artificial intelligence and machine learning, robo-advisers now have an unprecedented level of finesse and accuracy and can do complex tasks, including tax-loss harvesting and retirement planning.
Are robo-advisors just hype, or do they really offer tangible benefits?
Any service offered by robots is bound to be met with some degree of skepticism, firstly because one wonders if a robot can be as accurate as a human advisor, and secondly if the costs don’t outweigh the benefits. In the case of robo-advisors, it’s not just hype. The global market for them is continually growing, thanks to benefits such as:
- Affordability. One might imagine that robo-advisors are more expensive when, in fact, compared to the cost of hiring a human advisor, they’re more affordable. Besides, human advisors have restrictive criteria when selecting their clients and usually only choose the ones who have at least $100,000 in investable assets. To a beginner looking for guidance, this high cost to entry can be off-putting. Meanwhile, most robo-advisors have no account minimum or have a small one.
- Accessibility. Robo-advisors are available 24/7. Users don’t have to fill in paperwork or contact human advisors during business hours to execute trades and get advice. With robo-advisors, they can do this at any time, without leaving their homes. This perk is appreciated, especially by young traders, who are comfortable using technology and entrusting their funds to an automated tool. However, robo-advisors are starting to grow on senior investors too. According to a recent study, 50% of investors aged 53 to 64 manage their finances with digital resources.
- Accuracy. As every investor knows, trading has a strong psychological component that’s inherently tied to human nature. Both positive and negative emotions can cloud your judgment, pushing you to make investments that may not be so secure in the long run. For beginners, the risk of making a bad decision can be even higher, because they aren’t familiar with the long-term implications of trading. By using a robo-advisor, they can make less emotional decisions, and start on the right foot.
So, do these benefits imply that robo-advisors are unbeatable, that you no longer need a mentor, and that you should only rely on technology to execute trades? Not necessarily. Even with the degree of sophistication they’ve reached, robo-advisors may not be for everyone or, at least, not for every step of your trading journey. For example, once you’ve gained more experience and want to purchase individual stocks or bonds, you wouldn’t be able to do that with a robo-advisor because they have limited options. In this case, you may want to use a combination of human and robot advisors, and make certain decisions yourself.
Apart from robo-advisors, technology has influenced trading in many other ways, especially when it comes to easy access to information. Modern traders can monitor currency and stock performance in real-time, research a company’s performance before investing in it, or join social trading platforms to copy trading signals from experts. Last but not least, automated tools do a lot of heavy lifting behind closed doors, and most trading platforms rely on them to assess user risk or do margin calls. Overall, technology is one of the factors that has allowed trading to grow so much and gain widespread accessibility.