The robots have arrived, and fortunately they do not have the personalities of the B-9 robot from “Lost in Space” or Marvin from “Hitchhiker’s Guide to the Galaxy.” Rather, in the world of finance, they take the form of software designed to silently run complex algorithms.

The financial services industry groups “robos” into the broader category of financial technology, or “fintech.” Fintech encompasses everything from smartphone banking apps to high-frequency trading platforms to software monitoring social media for sentiment. It simplifies and speeds up tasks as well as brings cost efficiencies.

Some fintech is perceived as giving a boost to passive investing, but behind the scenes active decisions are very much being made. An example is the proliferation of indexes used to base exchange-traded funds upon. At the heart of every quantitative strategy are judgment calls made by humans. As Daniel Crosby explains here, index creation and maintenance involves some very active decisions.

The same applies to robo advisory services. Behind every online robo-adviser are financial professionals who have made or continue to make very active decisions about what parameters the software should use when allocating and managing portfolios. Technology can be very helpful, but it is still very much influenced by the human mind.

This automation has prompted various discussions within the financial industry about shifts in business models and employment. Some professionals within the financial services industry have been displaced (including…gasp!...writers). Anyone who has watched CNBC for more than a decade has likely noticed how much less trafficked the floor of the New York Stock Exchange has become. The same thing has occurred at the Chicago Mercantile Exchange over the years. Having been there many times over the years, I can tell you that it’s gone from being quite loud and littered with crumpled paper to being quieter and cleaner. There are still some floor traders at the CME, but their numbers have dwindled significantly.

What all of the fintech can’t do yet is manage investors’ complex emotions. When your brain is yelling “Danger, Will Robinson!,” software can’t hold your hand and explain why you shouldn’t abandon your strategy. It also can’t help you make a decision between choosing to postpone retirement or claiming Social Security early on the basis of lifestyle. (There’s only so much crunching hard numbers can do.) Fintech certainly cannot assist with the potential impact on family relations that estate planning decisions can have. These are tasks a human planner or adviser are better at.

We’re still in the early stages of fintech. The software and platforms will evolve. From the standpoint of portfolio creation, they will do better than human advisers who promote what earns them higher commissions and fees or the latest tip from their research department. But as in the sci-fi flick “The Matrix,” there will continue to be opportunities for those who can think beyond the rules governing the software. Doing so will require both discipline and a willingness to think outside the box.

As far as what robo advisers can currently do, AAII Computerized Investing editor Jaclyn McClellan provides an update to her January 2015 article “What Exactly Do Online Investment Advisory Services Offer?” here. Even in a span of approximately 18 months, the industry has evolved with acquisitions and new, large entrants. Jackie’s previous survey and her current survey of robo-advisers are still the most comprehensive I’ve seen. (Thanks to our intern Andrew Plis for his help in compiling the information.)

I want to alert you to two other updates. First, Jim Cloonan made a few rules changes to the Model Shadow Stock Portfolio: a larger maximum market capitalization, the exclusion of rental & leasing and utility companies and a new momentum requirement. You can learn more about the changes here. Second, we are updating our enterprise software at AAII. Among the new system’s features are better security. To help the transition go smoothly, please ensure that we have your correct email address on file by going to: www.aaii.com/myemail.

Wishing you prosperity, 

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII