Robots Vs. Humans – The Battle for the Future of Investing

In the Terminator movies, Arnold Schwarzenegger does not play a robot.  He plays a terminator, which is something different.

“I’m a cybernetic organism.  Living tissue over a metal endoskeleton”

If you are not familiar with the Terminator movies, they take place in a dystopian world where an artificial intelligence called Skynet has decided to eliminate humans from the planet.  The stubborn humans were finding ways to detect and defend against the machines that Skynet threw at them, so it created the terminators in order to blend in and get around those defenses.

In the first movie, the Arnold terminator is the bad guy.  He is sent back in time to kill Sarah Connor before she can give birth to the eventual savior of the human resistance, John Connor.  The second and third movies, however, Arnold becomes the good guy.  He is a terminator who has been reprogrammed to fight for the humans.

How does the Terminator relate to investing?

In 2013 the “robo-advisor” model was offered as an automated investment solution.  Since it was not spending money on expensive things, like people, it claimed to offer a top-notch investment solution for much cheaper than traditional advisors.  All you do is log on, answer a questionnaire, and your money gets automatically invested into a diversified portfolio of assets.  As a cheap and easy solution, it initially attracted large amounts of assets.

Some human advisors began to worry that machines were coming to take their jobs!   Investment conferences hosted sessions with ominous titles like “the threat of robo-advisors” and “the death of the traditional advisory business.”

Who will win the war for investor dollars?

Similar to the Terminator movies, both sides have adapted and will continue to do so.

The robo-advisors have hired – get this – humans to help advise some of their clients.  It turns out that a very large number of people would like a human perspective on how they should allocate their resources.  So now you can call an 800-number to speak with a qualified human about investment decisions.

The human advisors have invested in – ready for this one?… you guessed it – technology, to help make their services more streamlined and efficient.  Some of the basic analysis that was done by humans is now being done by software systems.

So which solution is the best?

“Come with me if you want to live”

The Terminator movies and the financial advisory business agree: the answer is both.  And, we see the same phenomenon across many different disciplines.

Garry Kasperov is a chess GrandMaster and the former World Chess Champion.  He is most famous for losing to Deep Blue, IBM’s chess supercomputer.  He has since done extensive work in the field of artificial intelligence.  In a 2010 article for the New York Review of Books he discussed a “freestyle” chess tournament where any computer, human, or team can enter.  What happened there is enlightening.

“The teams of human plus machine dominated even the strongest computers. The chess machine Hydra, which is a chess-specific supercomputer like Deep Blue, was no match for a strong human player using a relatively weak laptop. Human strategic guidance combined with the tactical acuity of a computer was overwhelming.”

Just as the robo-advisors are recruiting humans to help provide the emotional intelligence that is so important in an advisory relationship, traditional advisors are investing in technology to perform data analysis.  It is the combination of man and machine that gets the optimal results.

What does the future hold?

“I’ll be back”

The future of investing will see continued merging of man and machine, however, the human-driven firms will win the day.  That is because for all the advances in technology, financial services is still very much a relationship business.  The interfacing of a computer screen may be cheap and efficient, but when you have a serious nuanced question about your situation, the computer screen does not care.  The advisors they have hired to answer your phone call may care, but they lack the context that an ongoing relationship provides.  A trusted human advisor who knows you and your situation will be in the best position to address your needs.  They will just increasingly be supported by technology behind them.

Successful advisors of the future will look a lot like the terminator – human on the outside with machine learning programs underneath.  The ultimate winners in this world are the consumers.

Keith J. Akre, CFA, CFP® – Trust Officer

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Asset Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal. 

Note: This blog post originally ran as a Guest Perspective piece in the November 2018 issue of the Rockford Chamber of Commerce  The Voice publication.