{"id":32422,"date":"2018-11-13T15:01:24","date_gmt":"2018-11-13T20:01:24","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/i-robot-meets-wall-street-the-age-of-the-robo-advisor\/"},"modified":"2018-11-13T15:01:24","modified_gmt":"2018-11-13T20:01:24","slug":"i-robot-meets-wall-street-the-age-of-the-robo-advisor","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/i-robot-meets-wall-street-the-age-of-the-robo-advisor\/","title":{"rendered":"I, Robot Meets Wall Street: The Age of the Robo-Advisor"},"content":{"rendered":"

Not even Wall Street is safe from the machine learning megatrend.\u00a0 For many individuals looking to grow their wealth, hiring a human financial advisor can be expensive.\u00a0 The rise of the \u201crobo-advisor\u201d over the last decade has been an industry-wide response to this need for reasonably priced wealth management services.\u00a0 Robo-advisors apply machine learning to large datasets of investor preferences and investment outcomes to build customized portfolios.\u00a0 Once seen as a niche service, robo-advisors now manage over $224 billion globally, and are expected to grow to $1 trillion over the next four years.1<\/sup> Unable to ignore this trend, financial services firms like Charles Schwab, who have historically benefited from the fees charged for their wealth management services, have started using these technologies to provide a more efficient and customized service for a lower cost.<\/p>\n

In addition to increased competition, the machine learning megatrend has had a number of significant impacts on the wealth management industry, most importantly allowing Schwab to streamline its services.\u00a0 Traditionally, individuals looking for wealth management services would complete a form indicating investment goals, preferences, and risk tolerance.\u00a0 This form would then be reviewed with a financial advisor who would take time talking through the pros and cons of various investment options.\u00a0 Individuals would then meet periodically with their advisor to discuss any updates that may impact the investment strategy.\u00a0 This highly customized approach takes a significant amount of time, and is inherently subject to behavioral biases.\u00a0 Schwab\u2019s introduction of the robo-advisor has allowed them to dramatically reduce the amount of time needed to review investor needs, while still applying and adapting a suitable investment strategy over time as the algorithm receives new information.\u00a0 This frees up Schwab\u2019s human advisors to focus on situations that require real-person expertise, enhancing the overall quality of service offered by the company to its many clients.<\/p>\n

In 2015, Schwab launched \u201cSchwab Intelligent Portfolios\u201d2<\/sup> as its first machine learning application.\u00a0 This appeared to be the company\u2019s short-term solution to make the investment process as cost-efficient as possible for individuals.\u00a0 However, if the history of algorithmic investing has taught us anything, it is that by relying on a \u201cblack box\u201d to build, monitor, and adjust portfolios we may not fully understand how the data is driving decision-making and if those decisions will prove effective in future economic environments.3<\/sup> It has only been three years since the launch of Schwab Intelligent Portfolios, and while it may have been successful thus far, it may fail to perform when the decade-long bull market comes to an end and the learnings from the recent period prove to be uninformative in the new market regime.\u00a0 In these scenarios, the ability of Schwab\u2019s human advisors to see the \u201cbig picture,\u201d educate their clients, and analyze the market beyond the algorithms will be a significant value-add.<\/p>\n

With this medium-term view in mind, Schwab expanded its offering in 2017 to include \u201cSchwab Intelligent Advisory,\u201d a hybrid solution combining the benefits of its robo and human advisory services.4<\/sup> This allows a human advisor to intervene when the client\u2019s situation is too nuanced to fully rely on the automated service.\u00a0 Combining these two solutions also improves the feedback loop of the algorithms, avoiding uninformative updates when the market changes and inexperienced investors tend to panic.\u00a0 However, it still relies on the algorithms to make the investment process as efficient as possible, informing the human advisor and allowing them to focus their efforts on the most complex client issues.<\/p>\n

The largest concern currently facing the robo-advisory business is an algorithm\u2019s ability to prove successful through all market scenarios.\u00a0 By combining machine learning with human intuition, Schwab has the unique opportunity to improve its algorithms to serve as a stand-alone tool capable of managing suitable investments reliably throughout time.\u00a0 As human advisors utilize the algorithms to inform their advice, adjustments should be made to the automated questions asked, along with including automated follow-ups based on investor profiles to keep the feedback as informative as possible.\u00a0 While eliminating behavioral biases from advisors is important, it is also necessary to safeguard algorithms from potentially biases introduced by the client who may edit their investment profile over time in a reactionary way that does not effectively inform the investment decision-making process.\u00a0 With all these necessary improvements in mind, it is clear that there is still an important role for human advisors to play.<\/p>\n

Another large issue with using machine learning algorithms to manage investment portfolios is their difficulty in considering all aspects of a client\u2019s financial situation.\u00a0 The more complex the situation (typically positively correlated with overall wealth) the more difficult it is to fully rely on these algorithms.\u00a0 What is required to make these algorithms successful in all financial situations, and is it realistic to anticipate a world where human advisors are made obsolete?<\/p>\n

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(Word Count:\u00a0 797)<\/p>\n

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References:<\/u><\/p>\n

    \n
  1. Duggan, Wayne,\u00a0“9 Things to Know About Robo Advisors.” October 5, 2017, https:\/\/money.usnews.com\/investing\/investing-101\/slideshows\/9-things-to-know-about-robo-advisors?slide=10<\/a>. Accessed November 2018.<\/li>\n
  2. Charles Schwab, \u201cCharles Schwab Launches Schwab Intelligent Portfolios.\u201d March 9, 2015, https:\/\/pressroom.aboutschwab.com\/press-release\/corporate-and-financial-news\/charles-schwab-launches-schwab-intelligent-portfolios<\/a>. Accessed November 2018.<\/li>\n
  3. Knowledge @ Wharton, \u201cThe Rise of the Robo-advisor: How Fintech Is Disrupting Retirement.\u201d July 14, 2018, http:\/\/knowledge.wharton.upenn.edu\/article\/rise-robo-advisor-fintech-disrupting-retirement\/<\/a>. Accessed November 2018.<\/li>\n
  4. https:\/\/pressroom.aboutschwab.com\/press-release\/schwab-investor-services-news\/schwab-announces-schwab-intelligent-advisory<\/a>. Accessed November 2018.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

    Riding the new wave of algorithmic investing for individuals, how does Charles Schwab add value and set itself up for sustainable success in an ever-evolving global market?<\/p>\n","protected":false},"author":11289,"featured_media":32488,"comment_status":"open","ping_status":"closed","template":"","categories":[2730,4365,1084,346,546],"class_list":["post-32422","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-algorithmic-investing","category-artifical-intelligence","category-investing","category-machine-learning","category-wealth-management","hck-taxonomy-organization-charles-schwab","hck-taxonomy-industry-financial-services","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2018\/","yoast_head":"\nI, Robot Meets Wall Street: The Age of the Robo-Advisor - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/i-robot-meets-wall-street-the-age-of-the-robo-advisor\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"I, Robot Meets Wall Street: The Age of the Robo-Advisor - 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