So what is Robo-advising? Well, it's as it sounds like, it's basically a robot that gives you advice. It's an app that takes the place of a human financial advisor. As such, it can handle the logistics of your finances like show you all your accounts in your bank, in your stocks, in your mutual funds, and it can show you other things that you hold, it can present all your finances, it can help you facilitate transfers between accounts, it can help you pay your bills, and deliver money elsewhere. So a robo-advisor is a logistical help-mate that you'd have on your phone. That's all true and that's useful. But really think about what robo-advising is doing for you that's adding significant value to your life. It's not really those logistics that are the main source of value. As you see, the real value added by a robo-advisor is in helping you achieve your financial goals, helping directing your savings to investment vehicles that are appropriate for your goals. So in this module, we're going to cover the building blocks of robo-advising and it's going to focus on this biggest piece here, how robo-advisors deliver high impact investment advice and at a high volume to a lot of people at once and at low cost. So to understand how robo-advising adds value, it's worth just rewinding a little bit back a few decades to how it used to be. We think about how it used to be, rich people would have investment portfolios and they would have investment advisors. So they'd be managing this portfolio of their money for themselves, for their kids, for the long run, for their retirement, and so on. Then, other people, they wouldn't have financial advisors, they wouldn't even really be saving for their retirement so much. Back in the day, when I say back in the day, I'm talking about 40 years ago, 50 years ago. If you showed up at your job, you wouldn't be signing your 401k plan like you did picking mutual funds. Instead, you would be told, "Well, here's how it's going to happen for your retirement. Here's how it's going to happen." You have what we call a defined benefit plan. When you reach retirement age, you're going to retire. At that point, we're going to count up your years of service, we're going to multiply by that number say two percent and then we're going to take that, and we're going to multiply that by something like the last salary you earned, something like that, your average salary over the last years. Some formula like that. We're going to calculate that formula, that's going to tell us an annual pension and then that's what you're going to get. That's what you're going to get, you're going to stop working for your working wage and now you're going to trigger into retirement. At this point, you're just going to get that pension that is this defined formula of the money you've made. So this is how it used to be. It's just 40-50 years ago when you weren't thinking about how am I going to save for retirement for the most part. Maybe you're worried a little bit but for the most part you're thinking that's taken care of. I do what I do. If I'm making cars or I'm teaching a class or I'm steel worker whatever it is, I do my thing, I do my job, I try to do that well and then the whole financial question of how is retirement going to be paid for, that's being handled by financial professionals off-screen. So that's how it was but you don't have to read the news very far to see that benefit came at a big cost. So it's not just magic that the money is going to be there when it's time to retire. In fact, the employer has to stick to a schedule of making payments into a pension fund and then has to see to it that that money grows to the level that's needed so that the assets of the pension fund are sufficient for the liabilities, the liabilities being the pension payments that they have to make to the people who've retired. As you can see, if you just read the paper offline after this course, take a look at what's happened around the country with pension plans particularly municipal, state, and other government pension plans where the money paid into the plans really wasn't sufficient to meet this goal. They were relying on rates of return that they thought they were going to make but then they didn't make them and when they didn't make them, well the money just wasn't there. So this is going on right now. It's the biggest political story in the country. Really when you get down to especially at the state level, it comes up every time, what are we going to do? What are we going to do about the solvency of the pension plans? Look at what happened in Detroit. If you worked for the Detroit government all those years and you're looking forward to your pension, well, Detroit went in and out of bankruptcy. Coming out of bankruptcy, you're not getting quite what you thought you were going to get. How about the auto workers? The auto workers at GM and Chrysler. Once again, they had to take a haircut, they had to take less than they were supposed to get because the money just wasn't there. Look at Puerto Rico. Look what's going on in Puerto Rico. The enormous liabilities in Puerto Rico and everyone is fighting over the assets and if you are looking forward to a pension after a lifetime of teaching in Puerto Rico, you should be worried. You should be worried, the money just isn't there. So you have to, when you think about defined benefit plans,yes it sounds great. In theory, if I'm an autoworker, I'm not a finance expert, I never said I was, I never wanted to think about that. I wanted the employer to take that off my hands. But then that doesn't have to work out. It doesn't have to work out. When it doesn't, it's not even clear what you do. So these days, we were transitioning out of those defined benefit plans into today's world of what we call defined contribution plans. That's the distinction benefit versus contribution used to be. There was a promise there, you're going to get this benefits. So it's what happens at the end that's defined. These days, who knows what you're going to have at the end there? What's defined as how much you're putting into the plan? So for the most part, for most of you, you're probably looking at a 401k plan. 401k plan, this is where the tax code is encouraging this do it yourself retirement savings. So think about my paycheck, your paycheck, at the end of the month, money is taken out of my paycheck and pre-tax, that's the tax encouraging this. It comes at pre-tax, goes into the mutual funds that I chose for that money to go to and then my employer also pitches in some money too. All that money goes into the mutual funds and then hopefully it grows, it doesn't have to grow. it didn't grow yesterday, okay, but hopefully it generally grows and then when I reach retirement, I've got my social security but on top of that, wherever this ends up, that's what I've got. So that do it yourself retirement savings is just the way we live now. That's what's standard. So getting back to robo-advisors. If you think about where is the place that they're really creating the value, that's really the oxygen for this whole field, it's in helping people with these big financial decisions they now have to make, they didn't use to have to make them, but now you do. Now, do it yourself retirement savings were just about everybody and these are people who don't know any more than they used to about this field that that's not their field. So it's crucial to help these people save intelligently for retirement to help them come up with an investment plan, help them stick to it, and also to show them the range of outcomes that they can expect. So that's going to be the focus of this module here, to talk about how it is that these apps are accomplishing this goal. How is it that they are coming up with the advice that they are providing to their clients, that is creating the book of the value of these apps. What are the investment products that the apps depend on and how do those work, and then we can also talk a little bit about how, with a big data approach, these robo-advisors can customize the advice they're giving to the client.