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How Robos Will Change Investing

You’ve probably been reading about — and maybe even using — the automated wealth management services called “robo-advisors”.

These are companies (prominent among them Betterment, WealthFront, WiseBanyan, FutureAdvisor, Motif Investing, Bloom, and Personal Capital) that in some way use algorithms to create investment portfolios and then reinvest dividends, harvest tax losses, and rebalance when appropriate. In addition to the discipline they bring to asset allocation, the chief attraction of robos is that they are a lot cheaper than human advisors. Computers do the thinking while exchange-traded funds, index funds and other low-cost investment vehicles or strategies are used to create portfolios.

While still accounting for a small slice of the advice pie, robo-advisors are becoming popular among millennials and baby boomers alike, and I believe you will be using robo-advice in the future, whether or not you know it.

Some Background

As you might imagine, when robos appeared on the scene a few years ago they were greeted with an unwelcoming mix of skepticism, dismissiveness and disdain by most human advisors and their brokerage firm bosses. Robos were seen as just another Internet fad that would fade away as investors realized they needed the human touch.

When that didn’t happen, the traditional advice business became anxious, worrying that robos would do to them what iTunes did to the music business or what Orbitz did to travel agents: kill a good thing. That hasn’t happened (at least not yet), but to hedge their bets the advice industry’s incumbents are now in the “if-you-can’t-beat-‘em, join-‘em” mode. Traditional advice providers — giants such as Merrill Lynch, discounters and fund companies including Vanguard, as well as independent wealth management firms — are offering their own robos, are white-labeling a provider’s robo-service, or are considering the addition of a robo-offering.

A New Player

Recently, a technology giant behind the scenes in the advice business, Chicago-based Envestnet (ENV), announced that it would acquire Yodlee (YDLE), a Redwood City, California-based company known for providing account aggregation services, permitting an investor, for example, to see in one place all his or her brokerage statements, bank statements and credit card and mortgage balances.

While the Yodlee acquisition won’t make Envestnet a robo-advisor, it will enable the company to provide wealth management firms with everything they need to offer robo-advice, except the model portfolio part, which most wealth managers can add themselves pretty easily.

Soon, robo-advice offerings will be commonplace, from new robo-only firms to traditional advice providers. I’ll go out on a predictive limb and bet that within a few years giant mutual fund companies that now sell funds through advisors will bypass the middlemen and market their funds wrapped in a direct-to-the-consumer robo-offering. So whether you wind up buying robo-advice directly from a provider, baked into a product, or from a human advisor who lets a robo do the work, there’s likely to be a robo in your future.

DIY Robo

Ironically, with all the online tools currently available and those that are coming soon, you can be your own robo-advisor if — and here’s the big, big, big IF — you are disciplined, unemotional, and, counterintuitively, don’t obsess over your portfolio.

All you have to do is: a) decide to save 10% to 15% of your income come hell, high water, Depression or market crash; b) pick a not-too-complicated asset allocation mix consisting of index funds and ETFs that has a sufficient quantity of diversified equities; c) reinvest dividends and interest; and d) keep socking away your money, preferably in a tax-favored account such as an IRA or a 401(k), while seldom looking at your balances, never talking about your investments with friends, and ignoring stock tips and economic commentary on business television shows.

Won’t such a detached, unemotional approach turn you into an investing android? Yes, and that’s precisely the point.

Image courtesy of Victor Habbick at