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What are robo-advisers?

Robo-adviser

Some months ago we talked about FinTech and how the banking sector would face its imminent emergence in Spain. Here we highlight out one of its most popular aspects: the automated investment adviser.

6 april 2016

What are they?

Robo-advisers are investment management online services where the elaboration and/or operation of the investment portfolios of clients is carried out in a totally automated way. Through algorithms, they build a specific portfolio for each client and rebalance their investments according to market context, the risk limits set out by the investor, etc. Human interaction is minimal or non-existent. They substitute, to a large degree, the traditional figure of the financial adviser.

When did they arrive?

The first formal robo-advisers arrived around 2008, but similar automated investment software was already being used by financial advisers during most of the decade.

One of the first firms – now a worldwide reference – to offer automated investment services was the American Betterment, founded in 2008. It manages almost 4 billion dollars in investments (1 billion more than Wealthfront, its main competitor), and its value grew recently up to 700 million dollars.

How present are they in Spain?

Not very, for the time being. Nowadays we can find Indexa Capital – co-founded by professor Unai Ansejo – which operates with index funds (unlike Wealthfront or Betterment that use ETFs) and portfolios automatically appointed but manually created by the adviser team, and FeelCapital, whose portfolios are materialised automatically and individually, but leaves the contracting of funds to clients and their banks. Small advances we should closely pay attention to.

Are they effective?

We can say that there is a generation gap between robo-adviser sceptics and supporters. There are many advantages playing into their hands: it consumes very little time and the management is carried out with all the facilities the online platform offers. Those who do not trust managing their finances online will find the same problems here.

Regarding the investment itself, there are points in favour but also some doubts. The commissions applied to investments are minimal in a robo-adviser. For example, the aforementioned Wealthfront and Betterment offer taxes never exeeding 0.35% (human advisers may range between 1 and 3%). Another good thing is that they are a completely passive investment: theoretically, the used algorithms maintain clients’ portfolios within the prearranged limits, without needing to act. It is boring for people who enjoy consulting their portfolio on a daily basis, yet effective.

On the other hand, it is a format that is yet to evolve from its embryonic state, and that leaves many questions to be solved. For example, how would a bear market affect them? The founder of Portfolio Solutions expects a loss between 15% and 20% of robo-adviser clients in a situation of bear market: “Robberies have convinced many people of blindly giving them their money, and they can lose them the same way.” For the moment Betterment and Wealthfront are continuing to grow but at a much lower pace than other years (undoubtedly, with the increasing competition as another decisive factor).

 

¿How will banks face the FinTech challenge?

 
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