Big Data’s Impact On Investing And The Finance World

Big data's impact on investing is immense. Here's how it's making a difference in the finance world and investing habits.

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September 26, 2019
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Traditionally, the world of investing was bland and exclusive. Investment vehicles were not very different from one another and minimum capital requirements meant that even this was reserved for the few who had the means. Most ordinary people had to settle for a savings account at their local bank while some even opted to simply put their savings under their mattress.

But as with many other industries, the digital age has really thrown a wrench into the world of investing, forcing age old traditions to be scrapped in favor of new techniques and avenues. The old industry model is fast becoming obsolete and industry players will have to adapt to them or fall into obscurity.

Big Data and Its Impact

One of the main changes in the investment industry in the last few years has been the proliferation of big data. Big data is the accumulation of massive amounts of information. Data mining is the art of sifting through this mountain of data in order to make sense of it. Over the past few years, truly impressive amounts of data have been accumulated on just about anything.

The task at hand now is to interpret the data and put this information to productive use. And with computers becoming more and more powerful, this task is also becoming easier and the amount of data that can be processed just keeps increasing with time. We are fast approaching the point where massive amounts of data can be obtained and processed almost instantly.

What this all means is that investing will become increasingly more accessible to the average person. Minimum capital requirements are now able to be lowered and even eliminated, so that just about anyone can now set up an investment account online at almost no cost. This has the potential to completely overhaul the traditional investment industry.

Not only will there be more money available for investment vehicles to deploy, but many people who currently do their investing through intermediaries such as advisors might chose to abandon their advisors and engage in investing all by themselves, thereby putting those careers at tremendous risk.

Opportunities and Drawbacks of Analytical Investing

The main advantage of analytical investing is that the emotional aspect of investing can be removed if not eliminated altogether. This takes away human error from the equation and makes the process a lot more fact oriented. Using analytical programs to determine the best types of investments given a certain set of criteria set makes for a more optimal portfolio.

By using virtual tools to come up with investment recommendations, investors are able to reduce transaction costs to a bare minimum and therefore maximize their personal returns. Traditionally, investors would conduct trades through a physical brokerage intermediary as well as receive recommendations from an advisor and as a result would have to forgo some return towards their commissions.

One main drawback to this investment method lies in its advantage. Not needing to go through another human being might seem efficient to some, but too sterile and impersonal for others. Some people still very much prefer to meet with an actual investment advisor to talk about financial planning rather than rely on a program. This is what is known as the “Caveman Syndrome”.

This digitization process also presents challenges to the advisor industry. Since analytical investing is making human involvement in that process obsolete, advisors will need to find ways of differentiating themselves from this new competition. This could be done by providing better customer service to those who still wish to see a human being as that would be the main reason why they would still choose that.

The Rise of the Robo Advisor

A robo advisor is basically a virtual program that is based on an algorithm which uses information from a client obtained from asking a set of questions to provide investment recommendations and later on invest the client’s money automatically once the client has made his/her selections. This technology has only been around for about a decade, but it is already showing promising signs.

In the beginning, robo advisor programs were used by financial planners to provide the best investment recommendations possible, but clients still had to go through them as an intermediary. But in recent years, clients have been able to go straight to the source and, as technology improved, receive better and better recommendations.

Not only that, but with better technology came better and more services. This handy robo advisors overview by Investor Junkie shows you the currently best rated robo investing services and alternatives. In the future, it is expected that these robo advisors will be able to provide better and more numerous services to clients.

It is not too difficult to imagine a future where investment advising goes from a whole office that you have to drive to during certain hours of the day and days of the week to just an app on your phone that you have live access to all day every day. This technology is truly set to transform this entire industry from head to toe.

The Future of the Financial Industry

The future of the financial industry will be that of great change and short-term instability. Over the next few years, technology will fundamentally change the nature of this industry and especially how the people within it operate. People working in this industry will be forced to standout in different ways such as focusing on the human touch that robo advisors will never be able to bring.

Like Amazon forcing physical retailers to differentiate themselves because they cannot compete with Amazon in terms of cost, so too must physical financial advisory firms if they wish to stay relevant in the industry. It will be quite exciting to see how the industry will look once the technological dust settles.