COLUMN: Robo advisors need to tackle liability

Robo advisors for asset management have democratized the investment world. Now, anyone with a little disposable income can take advantage of valuable financial advice to optimize their portfolio–at a price point that makes sense for the average investor. 

But the average consumer also carries a lot of debt–a fact that today’s robo advisors do not take into account when making recommendations and is a much better indicator of financial health. Consider that US household debt has bubbled to $14+ Trillion and the average U.S. family carries $38,000 in personal debt alone, excluding home mortgages, and last month, the federal reserve announced consumer credit increased $17.5 billion in April, an annual growth rate of 5.2% (a five-month high).

It’s clear that Americans love cheap, readily-available credit. On the surface, there may not be anything wrong with that. After all, credit built the U.S. economy and allowed millions to raise themselves out of poverty by increasing homeownership and making education more affordable. The problem is that over the past two decades, the credit industry has exploded and grown more complex, leading most consumers to carry more and the wrong kind of debt—either with high or variable interest rates or with other terms that are simply unaffordable. 

Bad credit can ruin lives. It leads to overspending, undersaving and an increase in bankruptcies. Consumers with poor credit aren’t able to rent apartments, purchase a car or get a loan—directly impacting people’s quality of life. There are also macroeconomic effects of bad credit as well. Homeownership and entrepreneurial activity go down, less capital is available for investment, consumers lose purchasing power and the economy stagnates.

Consumers Need Credit Robo Advisors

It’s clear that consumers today need clear, easily-digestible credit information and advice so they can make informed decisions. However, while consumers have abundant access to investment advice, there is no financial advisor equivalent on the liability side of the ledger. Credit is complex and difficult to assess on an individual basis—making personal advisors for credit cost-prohibitive.

Fortunately, the technology to bridge this gap currently exists. Similar to investment robo advisors, credit robo advisors built on artificial intelligence (AI) and machine learning (ML) can provide credible credit advice on a scale and price affordable to the average consumer. These credit robo advisors will help people optimize their credit and debt, and provide recommendations for products that consumers are eligible for while helping them achieve credit health.

Here are three things that consumers should look for in a credit robo advisor:

1. Understand what’s available in the market.

Any credit robo advisor worth its salt needs to have relationships with hundreds of lenders, so it can identify credit products that are ideal for each consumer. It needs real-time access to rates and terms and be able to analyze products quickly to find accurate matches.

2.  Have a full picture of a consumer’s credit health.

A credit robo advisor also needs an accurate account of each consumer based on existing credit data — beyond just a simple credit score. This includes credit history as well as personal risk assessments.

3. Know how credit decisions today impact the future.

Matching consumers with the right credit product is only part of the equation. Credit robo advisors also need to understand how credit decisions impact consumers’ credit and ability to get credit in the future. Building good credit today opens doors to a better life tomorrow, and an ill-advised decision may impact someone’s ability to purchase a home, start a business or send their children to college.

Robo advisors have brought investment advice to the masses, but fail to address the liability side of the ledger which is a more reliable indicator of financial health for the majority of the consumers. Credit robo advisors have the potential to make a much bigger impact on the lives of the average consumer. Powered by AI and ML, these credit robo advisors can help consumers manage their credit better and put them in better long-term financial health.

Only then will we be able to ensure good financial and credit health for all Americans.

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