The Rise of the Robo Advisor

Some of the first FinTech robo-advisory services were introduced by North American firms like Wealthfront, Betterment and Wealthsimple. These companies provide automated investment services and personalized advice to investors with smaller assets. This investor group previously had limited access to advisors in the equities markets. These companies had set out to market primarily to Millennials, who tend to gravitate to digital and data-driven business models. It did not take long, however, for larger US-brokers like Vanguard and Charles Schwab to introduce their own robo-advisor services. Today, we see this trend is not limited to North America. Europe and Asia have seen their fair share of FinTech companies positioning themselves to grab a piece of the growing digital investments market.

Robo Advisor Companies

Companies like Nutmeg (UK), Wealth Horizon (UK), Owlhub (Germany), Privé Managers (Hong Kong), or Dragon Wealth (Singapore) are offering various degrees of financial planning, retirement planning, and tax optimization services, using a low fee structure that suits the targeted client segment. These companies have in common investments that are mostly drawn from a basket of exchange-traded funds (ETFs). Their algorithms will periodically rebalance the account without any human interference based on the investor’s personal information and investment objectives provided when setting up the account. However, minimum account balances and associated service levels can vary widely. For example, investing with Vanguard still requires a minimum account balance of $ 50,000 compared to $500 with Wealthfront or $0 with Wealthsimple. Vanguard also offers a hybrid model for wealthier investors, which includes robo-advice paired with access to a human advisors team or for the wealthiest investors a dedicated, personal investment advisor.

Robo Advisors vs Financial Advisors

Rules-based robo-investments made it easier for the hands-off investor to participate in the financial markets. At the same time, many fund managers have underperformed rules-based indexes. Here are some examples based on data pulled from SPIVA Statistics and Reports:

  • In the five-year period ending on December 29, 2017, the percentage of Europe Equity funds that underperformed the S&P Europe 350 were 73.26%;
  • In the five-year period ending on December 29, 2017, the percentage of Japanese Large Cap funds that underperformed the S&P/TOPIX 150 were 44.31%;
  • In the five-year period ending on December 29, 2017, the percentage of Indian Equity Large Cap funds that underperformed the S&P/BSE 100 was 43.40%.

On the surface, these numbers seem damning and may make some investors second-guess their trusted advisor but there is more to this story to tell then meets the eye.

The emergence of Artificial Intelligence

On March 15, 2016, reported an extraordinary feat for Artificial Intelligence (AI). Google’s Go-playing computer system had just defeated the Korean grandmaster Lee Sedol by four to one. Machines had beaten humans in games before, but this one was slightly different. Not just that the ancient game of Go is much more complex than chess or checkers it also requires a certain amount of intuition to succeed.

The prospects of machines becoming intuitive or emotionally intelligent may seem daunting and we are not quite there yet. True, human financial advisors cannot outperform straight forward rules-based robo-advice but they can use a rules-based approach and add to it.

The weakness of AI at this point is that it may have grasped nuances of human intuition, but it has not proven this on a larger, deeper scale. Algorithms are largely hardcoded, and while machine learning has made great leaps aiming to make AI self-learning and independent, it still has not mastered the complexities of human lives and aspirations. This leaves plenty of room for advisors who are comfortable basing their investment advice on their own rules-based approach in order to evaluate investment decisions. Paired with emotional intelligence, empathy and the ability to adapt to the clients’ real-life situations they most likely still have a huge advantage over pure robo-advisors.

The onus is still on the advisor, however, to find trusted products outperforming the markets on a regular basis. Keeping all this in mind should keep advisors in their role long after AI is able to laugh at a potential client’s joke.

Mike Welter is the Director of Migam Globel, an international provider of premier investment, insurance and family office products and services such as Wealth FriendsWealth InsuringWorld Class Brands Portfolio Strategy, Eljovi Multi-Strategy FundEljovi Indian Arbitrage Fund, and the Family Office Fund. Connect with us on LinkedIn or on Twitter at @GlobalMIGAM.

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