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Goldman Sachs turns to robo-advisors

The fact that Goldman Sachs has adopted a robo advisor is a signal to all would-be investors.

robot arm

By now, you know the drill – the robots are coming for everyone’s job. Whenever we see Boston Dynamics’s robo-dog fall over or we read a story about politically-incorrect AIs, it’s an easy premise to dismiss. But then we learn about things like the robo advisor, and our future comes into view.

Touted for their ability to re-balance portfolios, these programs are causing quite a stir. But will these algorithms negate the need for investment advisors? Goldman Sachs has recently employed their services, so… maybe?

In today’s post, we’ll see how NYC’s most notorious I-bank is using the robo advisor, and whether these programs will spell imminent doom for finance professionals.   

The Robo Advisor – What is it?

In short, the robo advisor is a financial algorithm that provides advice with no direct human supervision. It provides said advice by adhering to a strict set of rules embedded in its programming. 

As a result, these automated financial advisors have begun to show up in investing apps like Wealthsimple. Users provide details about their situation and goals, and the algorithm does the rest.

A Brief History of Robo Advisors

But as famous as this app has made robo advisors, Wealthsimple didn’t invent them. In actuality, these algorithms have actually been with us for quite a while. Back before social media was even a thing, wealth managers used portfolio allocation programs to save valuable time. But it wasn’t until 2010 that everyday investors could do the same.

Around that time, Betterment began operations. As the pioneer in the robo advisor field, they couldn’t have asked for a worse investment climate. The stock market was nearing its Financial Crisis bottom, and investor sentiment was in the toilet. That didn’t dissuade its pioneer investors, though, who entrusted their portfolios to a robot for the first time.

Thanks to Betterment’s focus on simplifying investing, they gained traction. Thanks to their hard work, the robo advisor proved its worth on the open market. As Betterment’s profile rose, so did companies like Wealthfront, Wealthsimple, and Acorns.

Today, the word is out – the age of the robo advisor has arrived.

Goldman Sachs Launches Marcus – What Does This Mean for Fintech?

Don’t think that the robo advisor is here to stay? Think again – Goldman Sachs, a bastion of the financial establishment, just launched Marcus, a consumer-orientated robo advisor service. If a 151-year-old investment bank is getting on board with something, it’s no longer a fad – it’s a trend.

Don’t get it twisted – Goldman Sachs hasn’t suddenly turned over a new leaf. They aren’t suddenly throwing caution to the wind – they’ve assessed where current generations are at, and they’ve acted accordingly. They know that almost half of Millennials and Gen Z currently view robo advisors as a safe way to invest.

So, if you have at least $1,000 to invest, you can open an account with Marcus. With an advisory fee of 0.35%, they come in beneath Wealthsimple Black’s rate of 0.4%. At the same time, they have the same comprehensive slate of stock and bond ETFs that leading brands offer to their customers.

So far, it appears that Marcus has made an impression on the investing public. As of September 2020, more than five million customers had created accounts with the Goldman Sachs service. However, don’t mistake their fast start for success – according to Business Insider, they’ve lost 1.5 billion USD since starting Marcus.

However, that has nothing to do with their robo advisor. In addition to robo investing, this online fintech platform also offers savings and lending services. So far, it appears most losses stem from soured loans issued through the platform.

Are firms like Wealthfront and Lending Club in trouble? If they underestimate the spending power of Goldman Sachs, they might be. However, the internet fluency, flexibility, and the startup culture of these firms mean they’ll likely be fine.

Can Robo Advisors Beat the Market?

Despite evidence to the contrary, many consider AI-driven systems to be a superhuman force of nature. Right now, this perception couldn’t be further from the truth. One day, your robo advisor may secure you market-beating returns, but that won’t happen anytime soon.

If you doubt that, look at their performance over the past year. In the first half of 2020, Wealthsimple’s robo advisor only eked out a 0.4% return. Vanguard’s robot did even worse, logging a 3.3% loss. Overall, the average robo advisor underperformed the S&P 500, losing 7.78% in 1H 2020.

These algorithms aren’t superusers – they can’t go short or long at exactly the right time, every time. However, all things considered, they held up pretty well to the volatility that 2020 threw at portfolios. At the end of Q3 2020, Backend Benchmarking, a New Jersey-based finance firm, analyzed the returns of 20 different robo advisors. Overall, they averaged a 1.9% return – not bad, considering the S&P 500 was up 3.4%.

Of these 20 robots, how many beat the S&P 500? Just five – Betterment, SigFig, SoFi, TIAA, and Wealthsimple. Betterment scored the biggest win, finishing up 5.49%. The moral of the story is this – beating the market is extremely difficult. Finance professionals struggle to do it, and apparently, does the “mighty” robo advisor.

Should I Use a Robo Advisor?

Markets don’t follow logic. Humans, who are its participants, are slaves to emotion. Greed, hope, fear all drive decisions to buy, hold, or sell. Despite statistics showing otherwise, we don’t stop trying to time the market.

So, should you let the robots take the wheel? Like most things in life, it depends. If you’re not wise in the ways of investing, but don’t want your cash to sit around like a freeloader? Then, in this case, employing the services of robo advisor makes sense. Robo advisors attempt to track the market, so you’ll get some appreciation, especially over longer time frames.

But if you want to beat the market, a robo advisor won’t get you there – at least, not yet. To beat a game based on emotion, you need to understand human psychology. Currently, robots aren’t good at this task, but a (skilled) financial advisor is.  

Robo Advisors Alone Won’t Make You a Millionaire

If you’re plotting to make millions with zero effort, sorry – robo advisors won’t allow you to cheat process. But, if you’re looking to save on fees while growing unproductive cash, these algorithms might just become your new best friend.

The fact that Goldman Sachs has adopted a robo advisor is a signal to all would-be investors. There’s no excuse to leave your money in a savings account anymore – the era of automated investing is here. 

Have any thoughts on this? Let us know down below in the comments or carry the discussion over to our Twitter or Facebook.

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Chris has been blogging since the early days of the internet. He primarily focuses on topics related to tech, business, marketing, and pretty much anything else that revolves around tech. When he's not writing, you can find him noodling around on a guitar or cooking up a mean storm for friends and family.

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