Robo-advisors vs Chatbots vs Humans

When forex and binary options trading robots appeared in the online space a decade or so ago, their creators were promising money trading robots will disrupt the entire industry. This did not happen. Now, finance and banking chatbots are claiming the same – they will replace humans and will disrupt the industry. The time will tell of and how this would happen.

The truth is these are valuable tools for both investors and the average customer but, in any case, they cannot replace human interaction not to mention human judgement and analytical skills.

We should differentiate between a financial and investing robot and a chatbot although a good number of bot creators do not seem to know the difference or avoid pointing at that difference. The much-hyped chatbots of today, in general, cannot be considered investment robots by definition. Those are algorithms that can understand pretty well natural language you use when you check your bank account or want to make a transfer but they are not investment tools, nor they are artificial intelligence per se.

In fact, investing robots like those used in foreign exchange trading are not artificial intelligence, too. For their part, these robots are algorithms programmed to act upon certain market signals like lows and highs, certain trading volumes, or other market indicators.

Simply put, algorithms aka robots and chatbots cannot act impulsively, nor do they have business intuition. Business and investing intuition is not a superficial skill but is developed based upon real life experience. Although investing and business decisions should be based on analysis and use of relevant data, an experienced investor would feel if a company is overvalued or undervalued even without looking at fundamentals.

Thus, the recent hype that chatbots and robots are already disrupting the finance industry and will soon replace humans as money and stock traders are greatly exaggerated. The main reason is that they do not have A.I., at least for now. Sure, some chatbots understand natural language but you cannot tell a chatbot: “Invest my money wisely!” This will be artificial intelligence, and this is which many pundits and reviewers do not understand.

Robots and Robo-advisors

The market however is flooded with finance trading robots that boast profitability in the range of hundreds and thousands of percent a year. Some algorithms claim they can outperform the market two-fold within a period of, say, three months. That’s a very good news for those market players that use the particular robot and have managed to set it up to gain such profits.

Financial quotes are shown on a PC monitor and on a tablet.
Robots and robo-advisors are useful for automated trading but cannot create an investment strategy of their own.

Nonetheless, this is still an algorithm. A human should tweak its settings and program the robot’s behavior to react to certain market conditions. You should be aware that such algorithms or analytical tools have been used before the digital revolution and are still used by human traders that utilize software to the extent that makes their analytical calculations easier but do not rely on automated trading.

For instance, Chinese commodity trader Wang Bing managed to grow his Guli Trend Aggressive Strategy fund by 2,100 percent since March 2015. According to him, his strategy is based upon market supply and demand analysis, which has been used by investors since the dawn of times. You can bet that he is using computer to draft his analyses but he is not using anything like a trading robot or “artificial intelligence”.

A step in the right direction, however, might be the rise of the robo-advisors. This type of software provides financial advice and investment guidance based on a client’s profile or strategy. Betterment is a good example of a robo-advisor that allows even household investors to enter the market but it is not an A.I. investor by any rate. The company behind this software claims they manage $5 billion through their robo-advisor but you should know that this is remarkably meager amount compared to the funds managed in more traditional ways.

Some experts believe that robo-advisors manage some $15 billion in financial assets by end-2015; nevertheless, investment banks like Charles Schwab, Morgan Stanley, Goldman Sachs, and Deutsche Bank manage investment funds in the range of trillions of dollars. Of course, they use software tools and some automated trading. Some of these banks even consider releasing their proprietary finance advice robots, but they still rely on human-performed analysis to make strategic investment decisions.

Chatbots Are Good in Support

In the light of the above, chatbots and to some extent robo-advisors are able to take some supporting responsibilities like checking your account balance, making simple transfers and purchases, etc. A chatbot can really replace a human support or call center employee, if you do not expect the bot to take complex decisions instead of you. At this stage, a decent bot can deal even with more sophisticated tasks such as analyzing your monthly expenditures and providing basic suggestions like which bills you should cover first and which one can be delayed for a while.

A woman is holding a smartphone in front of her laptop.
Financial and banking chatbots are gaining momentum. They still cannot perform complex transactions.

 

Even the most publicized banking bot recently, MyKAI by Kasisto, cannot deal with complex banking and finance transactions, though. Its software is able to learn based on your actions and transaction history but effectively it replaces only the personal visit to a bank office and is just a more sophisticated online banking interface.

The banks can take advantage of chatbots to reduce their payroll and eliminate traditional automated voice response systems but they still cannot rely on chatbots to perform much more than support functions. The same applies to their clients who look for more advanced finance and investing services.

Humans vs Algorithms

More advanced services may include investment advice or buy/sell advice based on market-, company-, or stock analysis. Software is already good in performing such tasks and there is where the future of robo-advisors, trading robots and financial chatbots lies.
Provided that such software is equipped with reliable and well-designed algorithms, it can be a good substitute for the traditional human investment advisors that are not quite affordable to the average household. Actually, such a tool eliminates tons of manual work performed by investment brokers in the past allowing any investor to make fast and rational investment decisions.

A man is taking notes in his notebook in front of a laptop.
Humans make better strategic investment decisions than any software.

 

A robot or a chatbot cannot make investment decisions outside its programmed actions that are based on algorithms. Humans can. Chatbots and investment robots have still a long way to go before they can demonstrate even average intelligence in terms of strategic investment decisions. They might be good in automated trading or instant analysis of tons of information but are no replacement for human investors, nor will be in the foreseeable future.

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