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Automated Financial Advisors Manage Human Investments

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Automated Financial AdvisorAutomated financial advisors will reshape the financial industry in the most profound way since the automated teller machine (ATM) became widely available during the 1970s. Just what are automated financial advisors? They are computer programs that are designed to make investment decisions for a person after they have developed a profile of the person’s investment goals and risk tolerance.

At the moment, automated financial advisors focus on making investment decisions using Exchange Traded Funds (ETFs), but once they become more widely accepted and more sophisticated, the possibilities are endless. In a nutshell, an automated financial advisor invests and manages a person’s investment capital and buys or sells Exchange Traded Funds (ETFs) based on an investor’s initial input and ongoing stock market changes.

How Automated Financial Advisors Work

Automated Financial Advisors
So how do automated financial advisors work? At this point, the concept is rather simple, although that will change over time as more complex automated financial advisor services are developed. For now, an automated financial advisor, which is in reality an interactive website, takes data input from an investor and invests the money provided by the investor in Exchange Traded Funds (ETFs) that fit their investment criteria and risk tolerance. Questions include things such as how much risk an investor would like to exposure their investment portfolio to and investment preferences. The automated financial advisor then automatically makes adjustments to an investor’s portfolio in reaction to changes in stock market performance to meet the investor’s goals, within the parameters that the investor set.   The automatic adjustments can include more sophisticated investment strategies, such as selling Exchange Traded Funds at strategic times during the years to save on taxes, based their performance.

All in all automated financial advisors are rather simple investment vehicles at the moment. However, many stock market strategists say that is exactaly what invidual investors need to do. Keep it simple and stay fully invested in the stock market to take advantage of the long-term gains that the stock market offers, which average approximately 9% per year when dividends are factored in. Automated financial advisors have the added advantage of charging extremely low annual fees that are in the neighborhood of 0.50% for their investment portfolio management services, which is far less than traditional financial advisors charge in fees. This is a big plus for long-term investors, as staying invested in the stock market and paying lower annual consulting fees can add up to bigger returns in the long run.   Saving a percent or two per year in investment fees can add up to big gains as an investment portfolio matures decades later.

Once a client’s investment objectives and risk tolerance are understood, an automated financial advisor will utilize model portfolios and financial algorithms to both allocate and manage investments automatically in line with a client’s investment objectives and risk tolerance. They provide strategic portfolio management that is somewhat, but not entirely passive. It is passive in the sense that they follow financial algorithms to make investment decisions without user input; however, they also will change investments over time, as stock market conditions change, in accordance with a client’s investment objectives and risk tolerance. They also use strategies, such as tax loss harvesting to reduce an investor’s tax bill, so there is an active management component to their services.   It is just very limited in nature.   Automated financial advisors tend to diversify investments across to increase performance in the long run.

The Automated Financial Advisor Industry

FutureAdvisorA whole new industry of financial service firms is starting to take hold that provides automated financial advisors to an investing public that wants to save money on financial management fees. The most prominent firms at this point are FutureAdvisor, Wealthfront, and Betterment. During June 2014, Wealthfront surpassed the $1 billion for assets under management, just a short two and half years after starting the company’s automated financial advisors website. Wealthfront’s clients tend to be younger than the average stock market investor. Sixty percent are under the age of 35, while a whopping 90% are not even 50 years old.

All of these firms have seen large increases in the amount of assets that they automatically manage for clients over the past two years, as the concept of automated financial advisors gains traction with investors, especially younger ones. One thing that distinguishes automated financial advisor financial service firms from traditional financial service firms is that the automated financial advisor financial service firms have lower initial investment thresholds to open an account. Their initial investment thresholds range from $100 to $10,000, which is considerably less than the $100,000+ that traditional financial service firms require from an investor to open an account. With about $4 billion in assets under management, automated financial advisor financial service firms still represent a very small fraction of the $17 trillion wealth-management market.

Of course, once a good idea catches on, more players will naturally get involved, and that is already starting to happen in the new automated financial advisor sector. Both traditional financial service firms and discount brokers are starting to offer a variety of automated financial advisor services. They often package them in conjunction with more traditional and expensive personal financial advisor services, so that investors can choose between using various types of service for their investment needs.

Do not be surprised to hear that FutureAdvisor, Wealthfront, Betterment or some other automated financial advisor financial service firm has been taken over by a name-brand investment management firm or discount broker in coming years. Their growth rate among younger investors will be enticing to established financial services firm looking to capture the business of a new generation of investors.

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