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Friday, 29 december 2017 | Redacción CEU
Robo-advisors, a financial counsel phenomenon on Wall Street, are a further proof of how the digital world is transforming the financial sector. This new generation of consultants, thanks to their algorithms, eliminate the human factor in the decision making. In the minds of investors and savers, there are key questions: is it advisable to delegate the management of finances to an algorithm? Can robo-advisors become more efficient than flesh-and-blood consultants?
Their mission is the same as the one that an investment advisor or a conventional asset manager has. They are known as "robots", but they are rather specialized software that provide advice and/or financial management, although in an automated and remote way, through our own algorithms and specific data. They offer the guarantee that emotions will not govern their decisions, nor they will cloud their judgment. They will not respond emotionally, they will not make mistakes, they will not get carried away by intuition. They simply cannot. The human factor is not part of the equation in how robo-advisors work.
In the US, automated advisors have gone from moving 2,300 to 20,000 million dollars in only four years, according to Deutsche Bank estimates. Although less widespread, their use is also an increasingly manifest reality in Spain, it is the fifth country in the European ranking. Finanbest, Inbestme, Finizens or Indexa Capital are some of the firms that offer these services to Spanish investors. If the trend continues, robot-advisors promise to play a prominent role in the global financial sphere, will these "robots" end up replacing flesh and blood advisors?
The robo-advisor's charm
These automated managers attractiveness lies in their simplicity, transparency, emotional independence and low cost. They are characterized by presenting themselves under modern user interfaces that have an informal, clear and friendly language. The investment does not intimidate. You can access them from a laptop at home while you are sitting on the couch and with the slippers on or from your cellphone on the way to work while waiting for the subway to arrive. Although the ideal profile of the robo-advisors seems to fit at a glance with the millennials, due to their technological character, their main clients are between 40 and 60 years old, as a report from Feelcapital reveals. This is a suitable model for investors with simple needs who manage digital environments, who may have a basic financial education or who are just beginning to invest.
It is not necessary to have a great patrimony to get this service. Thanks to their low rates, customers can manage their portfolios with a minimum investment. Automated advisors democratize the access to professional counsel that before was only available to investors with bigger capital. According to a report published by Deutsche Bank, conventional financial advisors charge approximately 1% of the investable assets –some of them may even reach 3%– for managing a portfolio of up to $100,000. Robo-advisors charge an average commission of 0,4%. Some brands even facilitate this service for free for investments that do not reach $10,000. The robo-advisors arrival allows this service to be delivered directly to consumers, the intermediaries disappear and the costs are reduced considerably.
Where do they come from? Where do they go to?
The first robot-advisors appeared in USA. They have been operating in this country for ten years, they began to carry out their activity in the middle of the financial crisis. Their initial goal was to balance the assets of the investors within predetermined parameters and dates. Their easy access and low cost managed to conquer small investors and the paradigm is now changing, anyone can access consulting services that previously were out of their reach.
Robot-advisors have begun to have a greater presence thanks to the impact that technology causes on the financial sector with the FINTECHs development. More and more digital platforms offer financial services. This fact has favored the interest of small savers, who otherwise would not have participated in this model. In Spain, for example, this year the wealth management has quintupled through these services. Part of this impulse comes from pension plans.
Although they are called "robo", as in robot, and "advisor", as in advice, these automated agents do not have to limit themselves to only counsel, they can offer a service where the client completely delegates his/her whole portfolio management to them. At first, many consumers were not prepared to share their personal financial information remotely or they did not feel very comfortable entrusting the management of their portfolio to a specialized software. However, this service has continued to penetrate the global financial market, above all, having an important presence among small investors.
But automated consultants also set challenges. The automated decision making and disconnected from the subjective factor can also imply greater difficulty when drawing the profile of the client or interpreting appropriately what he/she requires. Like Rafael Hurtado Coll, Specialized Doctor in Hedge Funds and Financial Crises and Professor at the CEU Institute for Advanced Management, explains: <<I believe in good advisors, regardless of whether they are roboadvisor or not. Additionally, I believe that the management of a client has a psychological part, getting to know the wishes and needs of the investor. This is where I see more shortages in roboadvisors>> In times of uncertainty, for example, customers may feel more vulnerable because of the lack of warmth that human contact brings.
The human factor continues to have a strong weight in the portfolio management. But the financial sector is immersed in a digital transition process and, therefore, of continuous evolution. Artificial intelligence and Big Data will be key in the development of this technology. In the near future, spotlights can be directed towards these robot-advisors that seem to be destined to occupy a more prominent role. When the time comes, would you allow a robot to manage your finances?