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Can Robots Manage Your Money Better Than You? Startups Say Yes

Dec 30, 2013
Originally published on December 30, 2013 10:14 am

Millions of people are turning their thoughts to self-improvement and New Year's resolutions this week. And one of the most common resolutions, after promises to lose weight or get in better shape, is to be better about money.

A handful of entrepreneurs in the Bay Area have taken note — and they believe the time has come for you to try a different way of managing your money.

Mike Sha's dream is that one day, you will turn your investments over to a robot. "A smart robot," stresses Sha, who's behind the San Francisco-based startup SigFig.

We're not talking C-3PO here. What we're really talking about is algorithms. SigFig has built a website that will manage your portfolio for you automatically. The site searches out the lowest-fee funds. It makes sure you invest in a diversified portfolio. It matches the risk of your investments to your age, to when you want to retire and to your personal financial goals.

And then it automatically rebalances your investments to fit that plan over time.

In short, Sha says, it does pretty much everything a human financial adviser could do.

But What's Wrong With Human Advisers?

"Unfortunately, humans are expensive," Sha says. "They can be prone to bias, based on how they get paid or how much they get paid."

Many personal financial advisers are paid more depending on the stocks or investments you, the client, buy. Conflicts of interest riddle the industry. And there are other problems with humans, too.

"They don't scale well, so a person who is trying to manage money for a couple hundred people, they can't look at everyone's account all the time," Sha says. "So ... if you could replace that human with a machine — which has been done in a lot of other industries to great success — you really can build a better, more scalable, lower-cost solution."

SigFig charges a flat fee of $10 a month, not a percentage of the money it manages or a new fee for each transaction.

And Sha isn't the only entrepreneur pursuing this dream; Betterment and Wealthfront do the same thing. And the tiny little startup Wallet.AI wants to take it a step further.

When Wallet.AI's Omar Green and Boris Fedorov look at someone's finances, they start with a simple question: "By living the way you are living, are you adding to your net worth every day or are you subtracting from it? Are you becoming more cash-flow positive, or less?" Fedorov says.

Wallet.AI is trying to build a product that will monitor each and every one of your transactions, then send you text messages if you start to stray from the virtuous path.

For example, in October, one user started using the ride-sharing service Uber instead of taxi cabs. Now, catching a ride in an Uber town car is nice, but it can cost a fair bit more.

"Based on that insight, we were able to determine that they could have saved over $200 if, for every Uber trip that they took, they took a cab [instead]," Fedorov says.

So they sent a text message to that user with a heads up. "And it's not that we have any kind of vendetta against Uber," Fedorov says. But the data doesn't lie — and now that Uber addict is using Uber about half as much and saving about $100 a month.

No human financial adviser would ever have the time to do something like that, but for a well-programmed computer, this kind of tedious work is easy.

The Human Element

So, is there anything a human financial adviser can do that a bot cannot?

Carl Richards, a financial adviser himself and author of The Behavior Gap, a book about why people do stupid things with money, says a human might be able to save you from yourself.

"I think a lot of the services that are popping up are doing an amazing job with all of those things that can fit into an algorithm," Richards says. "The dilemma I have is what's going to happen when somebody wants to do something stupid. And the easy example would be ... selling out of the market when the market goes down.

"To me, it's the one spot where having somebody on the other end of the phone that knows you — your family, your values, your goals — to walk you in off that ledge may be irreplaceable," he says.

While Richards says a well-programmed robot would certainly advise its clients not to sell in a financial panic, he thinks many panicky people will be sorely tempted to simply turn those machines off in a severe downturn and sell.

Still, Richards admits that bots offering automated financial management are already lowering the price for fairly sophisticated financial advice. And in the process, they're making it more affordable to the masses.

So who knows? Maybe the time has come to embrace the Robot Age — although, perhaps it's best to keep 2001's HAL in mind as our money moves into the digital future.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

RENEE MONTAGNE, HOST:

At the end of year, millions of Americans turn their thoughts to self improvement in the form of New Year's resolutions. And after promises to lose weight and get better shape, one of the most common resolutions heading into the New Year is to do a better job of money management.

As NPR's Steve Henn reports, a handful of entrepreneurs in the Bay Area believe the time has come for you to turn your finances over to a robot.

STEVE HENN, BYLINE: I met Mike Sha in the offices of his San Francisco-based startup SigFig. Sha has a dream. He dreams that one day you'll be comfortable turning over your investments to a robot.

MIKE SHA: A smart robot. Yeah.

HENN: And we're not talking C-3PO here. We're really talking about algorithms.

SigFig has built a website that will manage your portfolio for you automatically. The site searches out the lowest fee funds. It makes sure you invest in a diversified portfolio. It matches the risk of your investments to your age and when you want to retire and your personal financial goals. And then it automatically rebalances your investments to fit that plan over time.

In short, according to Sha, it does pretty much everything a human financial advisor could do.

SHA: Unfortunately, humans are expensive. They can be prone to bias, you know, based on how they get paid or how much they get paid.

HENN: Many financial advisors get paid more depending on the stocks or investments you buy. Conflicts of interest riddle this industry and there are other problems with humans.

SHA: They don't scale well so, you know, a person who is trying to manage money for a couple hundred people, you know, they can't look at everyone's account all the time. If you could replace that human with a machine - which has been done a lot of other industries to great success - you really can build a better, more scalable lower-cost solution.

HENN: SigFig charges a flat fee of 10 bucks a month - not a percentage of the money it manages or a new fee for each transaction.

And Mike Sha isn't the only entrepreneur pursuing this dream. Betterment and Wealthfront do the same thing. And the tiny little start-up wallet.AI wants to take it all a step further.

OMAR GREEN: We do measure things that are like cash flows and cash flow positivity.

HENN: That is Omar Green. His partner, Boris Fedorov, says when they look at someone's finances, they start with a simple question.

BORIS FEDOROV: By living the way that you're living are you adding to your net worth every day or are you subtracting from it? Are you becoming more cash flow positive or less?

HENN: Wallet.AI is trying to build a product that will monitor each and every one of your transactions. And then they plan to send you text messages if you stray from the virtuous path.

FEDOROV: So in the month of October, a particular user started using Uber instead of taxi cabs.

HENN: Now, catching a ride in an Uber town car is nice, but it can cost a fair bit more.

FEDOROV: Based on that insight, we were able to determine that they could have saved over $200 if for every Uber trip that they took they took a cab.

HENN: They sent a text message to that user - with a heads up.

FEDOROV: And it's not that we have any kind of vendetta against Uber.

HENN: But the data doesn't lie and now that Uber addict is using Uber about half as much and saving roughly $100 a month. There's no human financial advisor who would ever have the time to do something like that, but for a well-programmed computer this kind of tedious work is easy.

Now, at this point I'm beginning to wonder if there is anything a human financial adviser could do that a bot cannot. So I turn to Carl Richards. He wrote the book "The Behavior Gap." It's about why people do stupid things with their money. And Richards is a financial advisor himself.

CARL RICHARDS: I think a lot of the services that are popping up are doing an amazing job with all of those things that can fit into an algorithm. The dilemma I have is what's going to happen when somebody wants to do something stupid. And the easy example would be, right, like selling out of the market when the market goes down.

HENN: While Richards says a well-programmed robot would certainly advise its clients not to sell in the midst of a financial panic, he believes many panicky people will be sorely tempted in a severe downturn to simply turn those machines off - to shut them down and sell anyway.

Still, Richards admits these bots are already lowering the price for fairly sophisticated financial advice. And in the process they're making it more affordable to the masses.

So who knows - maybe the time has come to embrace the Robot Age. I mean what could possible go wrong?

(SOUNDBITE OF MOVIE, "2001: A SPACE ODYSSEY")

DOUGLAS RAIN: (as HAL) I think you know what the problem is just as well as I do.

KEIR DULLEA: (as Dr. Dave Bowman) What you are talking about, HAL?

RAIN: (as HAL) This mission is too important for me to allow you to jeopardize it.

HENN: Buy Twitter, HAL.

(SOUNDBITE OF MOVIE, "2001: A SPACE ODYSSEY")

RAIN: (as HAL) And I'm afraid that is something I cannot allow to happen.

HENN: Please?

(SOUNDBITE OF MOVIE, "2001: A SPACE ODYSSEY")

RAIN: (as HAL) I'm sorry, Dave. I'm afraid I can't do that.

HENN: Steve Henn, NPR News, Silicon Valley. Transcript provided by NPR, Copyright NPR.