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Published On: Mon, Oct 24th, 2016

Robot Advisors Are Taking over the Financial Industry

The financial industry is experiencing a turmoil, as more and more companies rely on robot traders as the best way to make profitable investments.  What was previously known as a type of trading in forex and binary options industry has now become a mainstream solution for big players like Charles Schwab, Deutsche Bank, Morgan Stanley, Bank of America, Vanguard etc.

Even though human experts will be here to stay, robots used for trading are usually based on hybrid technologies, algorithms, and supercomputers which make their predictions more precise and reliable. That this is not just a seasonal trend is visible from the exponential growth of robot presence in the industry. In 2012, robot companies managed portfolios worth 0.9 billion USD, but in 2015 the number reached 12 billion. As robots are becoming essential in portfolios of Future Advisor, Wealthfront Betterment, and other companies, it is understandable that they will become even more influential in the future.

Robot Advisors – Possible Thanks to Technology

After initial skepticism, the financial industry is relying more and more on robots that are able to execute precise planning and portfolio management thanks to objective information generated after scanning the market and taking all parameters into consideration. Thanks to robot advisors, human error is reduced to a minimum and all investors in financial markets can get the same level of service.

This high level of precision is possible thanks to latest technology and supercomputers that are procession information at a higher rate than regular personal computers or financial advisors. Of course, humans are still an important part of financial industry, but robots are reducing costs while providing superb service which makes future of people working in the financial industry quite questionable.

photo/ Gerd Altmann via pixabay

photo/ Gerd Altmann via pixabay

Dark Future for Market Specialists?

Even though robot traders are taking over the market, which means cutting down real employees to a certain level, it is impossible to imagine financial industry operated exclusively by robots. However, robots are still making entire industry more virtual and are not limited only to financial investments, as they can be used as supervisory systems in time and money management, accounting, systemization, and optimization. Robots increase control and effectiveness as employees of financial firms can focus on tasks of higher relevance.

At the moment, robots are providing traders with the most precise projections, but are lacking personalized approach that can only be reached through human interaction. Also, it is in human nature that they are keen on filling their short-term desires (like a new car, or vacation) rather done long terms (having a good retirement fund), and this is where human experts, advisors, and analysts can build a lasting relationship. Also, many traders and other participants in financial markets still believe how human traders have more credibility.

Regulation of Robots in Financial Industry

Of course, many specialists are concerned about the legality of this new approach in financial markets. The concerns are raised mostly because of unregulated market and lack of any directives regarding robot trading. This radical change may lead to a volatile market and uncertain future of the financial industry.

The European Union created a joint committee of EBA, EIOPA, and ESMA, three supervising authorities that started a debate on robot advisors. In 34-pages long document they are discussing all aspects of robot trading including the main characteristics of trading algorithms, potential benefits for consumers (like lower costs, better access to financial services, higher quality of services provided) and companies, but are also warning about the potential risk.

Risks of robot trading include lack of information and clarification that can help users understand the recommendation, unsuitable advice, lack of motivation to understand the investments and lack of human support.

Author: Katherine Mathews

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