4 ways automation technology is changing the way RIAs invest

Investors are consuming information everywhere—through mobile devices, laptops, or on TV—and the news has no shortage of urgent headlines and sound bites to draw their attention to money and the markets. I probably don’t have to tell you that.

At the same time, information technology is helping investors do one thing or another better than ever. Things like index funds, low-cost trading, and exchange-traded funds have been great raw materials for many in the investing community.

The speed of information is hitting investors harder and faster than ever before, and it’s also leading to the development of better and better investment vehicles—but is any of that helping them invest better? Not really.

The real question today is, how can people invest wisely and do it in a way that’s efficient, keeps their emotions at bay, doesn’t cost much, and gives them confidence that they have spread their risk around evenly—so that they come out ahead?

(Related read: Automating investing decisions can save investors from themselves)

Traditional firms tried investor education for the last 20 or so years, and it hasn’t worked terribly well. A better answer, I believe, is technology, and making it easier to do the right thing.

Automation technology is the tool that is helping investors achieve better outcomes by taking the (irrational) emotions and (stressed-out) decision-making out of the picture in order to improve returns and save time.

At Betterment, we have been offering this service directly to individual investors since 2010, and we now have nearly 50,000 customers and nearly $1 billion in assets under management. In October 2014, we launched Betterment Institutional, designed especially for advisers who want to use our smarter investment technology to scale their business and spend more time with their clients.

(More about Jon Stein: Check out his profile as part of our 40 Under 40)

Automated investing bundles smart user experience design (i.e., the UX)—based on findings from behavioral economics—with the most efficient investment vehicles (ETFs) to help consumers and advisers achieve better outcomes. That means more money in investors’ pockets and more time available for other things in life.

4 Ways Automation is Changing Investing

Improved Tax Efficiency: Smart tax strategies, like tax loss harvesting and tax-aware share selling, are some of the best ways to boost investor returns without taking additional risk. Customers or advisers using an automated platform can receive the benefits of lower taxes with the press of a button—removing most manual time expenditures and human error from the process. Betterment’s research shows tax loss harvesting automation can add 77 basis points on an annual basis to net investor returns.

Personalized, Goal-Based Allocation Advice: Automation allows for the precise and fast creation of multiple personalized portfolios, each with an asset allocation set exactly for the purpose of that goal (long term, short term, saving for a purchase, saving for retirement). Think of it as creating mini target date funds for a variety of goals.

Automated Management: Ongoing portfolio maintenance is automated in the most tax-aware ways possible—automation means using every cash flow (deposit, dividend reinvestment, or withdrawal) to rebalance a portfolio on a regular basis, always mindful of long-term and short-term gains. With Betterment’s automated investing platform, fractional shares mean cash flows are distributed with precision down to the penny.

Previewing Outcomes: Experienced investors know that movements inside a portfolio—such as changing allocation or withdrawals—have tax consequences. Today, algorithms, such as Betterment’s new Tax Impact Preview tool, allow investors to preview the impact of their actions before they commit—a powerful tool for providing a data-based rationale for staying the course or postponing activity to improve a tax situation.

If you’ve been following wealth management news, you have inevitably heard of robo-advisers like Betterment. For too long, the story was that technology was trying to usurp the role of advisers, and my response is that we’re doing quite the opposite.

We are trying to augment and help everyone who is involved with money management and wants to see investing do better for all people, whether that is individuals or advisers. Our goal is to provide the best possible technology to make that happen.

Jon Stein is the founder and CEO of Betterment. Jon started Betterment after years of consulting for Wall Street’s biggest financial institutions. He studied economics at Harvard University and finance at Columbia Business School, and is a Chartered Financial Analyst.