Robo-adviser for investments. Is it time for managers to pack their bags?

robot invest
By Naim Fadhoud
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Can robo-advisors for investments and artificial intelligence replace live managers? We carefully assess the possibilities of robo-advisors to obtain additional income from investments, not to be accused of inertia and backwardness, we analyze the advantages and disadvantages.

Can robo-advisors for investments and artificial intelligence replace live managers? We carefully assess the possibilities of robo-advisors to obtain additional income from investments, not to be accused of inertia and backwardness, we analyze the advantages and disadvantages.

Innovations in the world of financial services

In the last 5-10 years, the financial industry has undergone global changes. There hasn’t been such a change in principles of financial services since the 1970s, when the first ATMs, discounter brokers and mutual funds, or Mutual Funds in Russian, appeared.

In particular, what has changed is this:
1. Online-only banks do all the traditional transactions much faster, at less cost to the customer.
2. Peer-to-peer lending platforms (where money is lent to an individual by another individual without a bank intermediary) are competing with the usual lending instruments.
3. Robo-advisors for private investors are trying to squeeze managers and stock advisors.

Let’s talk about the latter phenomenon in more detail.

One of the first on the market in 2009 appeared a service for investments Betterment, which, as its developers write, helps to manage funds rationally and efficiently, to plan finances, bypassing intermediaries.

As of February 2019, Betterment manages $16 billion of users. There are a total of about 400,000 accounts registered here. Assets managed by online robot advisors in the top five rankings total $187.5 billion. By comparison, the amount of funds raised by Sberbank asset management companies is now about $1.5 billion.

What are robot-advisers for investments and how do they work

Robo-advisers (robot-advisers) are special programs based on AI technologies that help you place your money in financial instruments, manage your investments to maximize returns with minimal risks. Some robot-advisers allow you to intervene in the decision-making process, while others are fully automated.
It is noteworthy that the Betterment premium package includes the option of communication with a live financial advisor. That is you can’t do without intermediaries at all for large investments.
Such “autopilots” are positioned as smart investment aides, suitable for beginners who have no time and opportunity to understand financial instruments on their own. The entry threshold for foreign products, depending on the platform, can range from $10 to $50,000. The management fee varies from 0 to 0.5%, with an average of 0.25%.

In an ideal picture, the software code will analyze your wishes, take into account your income and expenses, assess your character traits and then create an individual financial investment plan. All you will have to do is to keep track of your profits.

Online investment services are not personalized

Even though the robo-adviser seems to analyze the information you provide about yourself in the questionnaire, it still may not be quite enough to reveal all the nuances of your character. Maybe in 10-20 years, when there are more digital data on your behavior, this problem will be solved.

Many automated advisors today allow you to prescribe and edit your investment goals. But you may have individual preferences that only a live advisor will understand.

Another point is that the universal algorithm, embedded in the advisor, limits the asset classes available for purchase. For an advanced investor, this can be a disadvantage.
The Expert Advisor is difficult to trust
When working with a personal Expert Advisor, you can always talk to him, frankly, heart to heart. He senses your concerns, knows your real life circumstances and goals. You see this and are therefore much more willing to trust him.
Ways to interact are limited
Most robo-advisers only support textual contact with the client (email, online chat). Customer support may not be available on weekends. For those who work in the sweats all week and want to track their investments on weekends, this can be a problem.

Frequent Portfolio Balancing

Almost all bots regularly rebalance the composition of your investment portfolio (if you don’t, you get skewed assets and shares). Let’s say you were originally assigned 70% stocks and 30% bonds. Depending on market movements, the ratio could become 80/20. The robot’s job is to maintain an optimal asset allocation. They can do this daily, weekly, monthly, quarterly. If this happens too often, the number of transactions increases, and as a consequence, you pay more brokerage commissions.

You don’t become Warren Buffett if you only rely on robo-advisers. They are not adapted to aggressive trading, they apply passive strategies. Even with maximum risk adjustment, a robot program will invest with extreme caution. After all, the reputation of its manufacturer is more important than your income.

Finally, no one knows how a robot advisor will behave in a falling market. So far, no user has ever had such an experience. The very first Betterment Assistant was launched in 2009, and over the past 10 years, the S&P 500 Index has rallied, showing a plus of 2 to 32% per year.

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