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Roboadvising: will artificial intelligence be able to capture the sphere of investment?

Monday, September 13, 2021

Roboadvising is a robotic software that collects a portfolio of investments for a beginner investor. Can the program be a full-fledged replacement for a financial advisor?

Startup Jedi

We talk to startups and investors, you get the value.

The financial sphere has never been stable, and in recent decades has changed completely with the speed of thought: banks are moving online, bitcoin and blockchain have appeared, companies turn hundreds on IPO, and the number of “unicorns” is growing exponentially. Another landmark innovation is roboadvising: a robotic software that collects and helps manage a portfolio of investments for a beginner investor, effectively replacing a financial advisor.

Roboadvising has already won its place under the sun in the United States: millions of ordinary citizens use the services of robot advisors there, and dozens of similar services have appeared and are gaining momentum in the CIS. But can the program be a full-fledged replacement for a living person in such a complex area as investment? Let's find out.

Prerequisites for the appearance of roboadvising

Banks are becoming  online. The banks, which were the first to introduce online operations, greatly outperformed their competitors in terms of speed and quality of service. Nowadays it is possible to carry out almost any banking transaction, including buying and selling shares.

Anyone can become an investor. The rise in the quality of life of the Earth’s population, the development of the Internet, the popularization of the economy as a science - all of these factors have contributed to the fact that investment has ceased to be the domain of elite banking circles and has become available to any member of the middle class. Or, to be precise, any person with an accumulation.

The growth of the number of private companies. The development of startup culture and business in general — over the past 30 years, there has been not just a leap in this direction, but a real leap above the head has led to the fact that the number of public companies has grown dramatically. This means that there are more opportunities for investment.

Blurring the borders of states. It is not for nothing that anthropologists say that the Internet has turned the world into a “global village”: now you can find out what is happening on the other side of the world and communicate with a stranger thousands of kilometers away in two clicks. This has also affected the investment world: it has become much easier to invest in foreign stocks and funds.

Automation of everything. The main direction of technological progress is to replace a person with a mechanism wherever possible. And over the past 10 years, thanks to the emergence of machine learning and complex programs using artificial intelligence, automation has accelerated to the limit.

How does roboadvising work?

Using a special algorithm, the program analyzes the client's initial data (risk stability, goals, investment size, and so on), selecting the most suitable investment portfolio for him. The robot chooses what the distribution of investments in the portfolio will be, and also calculates a forecast for the risks and profitability of the portfolio.

The final decision on the purchase or sale of assets is made by the investor himself. Another function of roboadvising is automatic portfolio balancing: when there are changes in the market, the robot offers actions that will help avoid losses. The investor can not waste time on daily monitoring of the markets — the system will analyze and propose changes independently.

You can use roboadvising from a certain threshold of capital that the investor is ready to invest. In the United States, depending on the specific program-adviser, this threshold can be from $10 to $50,000. For robotic portfolio management, a commission is taken, which can vary from 0.2% to 2% per year.

Stages of roboadvising work

1. Collecting customer data

After registering on the site, the user is asked to pass a questionnaire. Using the answers to the questions, the main parameters are determined by which the investment strategy will be formed: the level of risk, investment goals (big purchase, money for retirement, passive income), the size of investments, and so on.

2. Formation of a securities portfolio

After analyzing the information, the robot adviser offers several options for investment strategies. How do they differ? First of all, the ratio in the portfolio of stocks and bonds-their proportion depends on the degree of readiness for risk. Bonds are a debt obligation of a company/state — this is a more stable type of securities, but less profitable. The shares confirm the ownership of a part of the company, their profitability depends on the" health " of the company, and in a short period-on many external factors, including politics and high-profile international scandals. Remember how Elon Musk's tweets brought down Tesla shares? Shares give a higher yield, and if the company “takes off” —  they are even able to make their owner rich, but the risks are significantly higher here.

In the most conservative version of the investment portfolio, bonds will prevail (up to 90% of the portfolio), in the moderate one, the proportion will tend to the 50/50 option. The risky version of the portfolio contains mainly stocks-because it is aimed at obtaining maximum income.

3. Opening an account and adding funds to the account

Basically, all the programs in robot business are created by big banks, so the investment account is opened at the bank where the robot advisor belongs. For servicing a robot-edward takes a percentage of the value of the assets. In the United States, this amount is between 0.2% and 1.5% per annum of the value of assets, in Russia it is higher, ranging from 1.5% to 2% per annum.

4. Automatic portfolio management

The robot executor regularly rebalances the portfolio —  monitors changes in the market and advises the investor to sell or buy some assets. The algorithm analyzes all available information on the company’s status, earnings, debts and profitability, tracks industry news and the situation on the world’s largest exchanges. Machine learning allows the algorithm to constantly learn and improve itself.

Each share transaction is charged an additional commission —  on average, it is 0.25% of the value of the transaction, so too frequent rebalancing of the account can reduce the overall yield. According to roboedviser “Financial Advisor” (ITI Capital) the optimal time for rebalancing is 1 time in 3 months.

Roboadvising in the world: the largest companies

Betterment (United States) is one of the first automated services for investment, the company entered the market in 2009. Currently, roboedviser manages assets worth more than $16 billion. Interesting fact: in the premium package of the company there is an option of contact with a living financial advisor.

Schwab Intelligent Portfolios — the adviser manages more than $37 billion, the service is used by more than three hundred thousand people.

Personal Capital —  the service has a free basic version, which is used by more than two million people, and a paid version with all the functions of an advanced robot adviser.

Ellevest is a robot adviser that is designed specifically for women. When forming an investment strategy, it takes into account behavioral differences, the difference in income between men and women, needs, savings strategies and other gender factors.

The state regulates the work of roboadvisers: for example, only residents of the United States can use American programs, similarly with other countries.

Roboadvising on the Russian market

There are several robo-advisors on the Russian market, mostly they all belong to large banking and financial structures. Among them are: 

  • The service “Simple investments” from Sber.
  • Personal financial assistant from Alfa-Capital Management Company.
  • Tinkoff Bank's robot adviser.
  • Financial Adviser from IT Capital.
  • The SmartInvest service from Rosbank.
  • The Yummy product from Yandex.

Several roboedvizers —  Yammy, “Simple investments” and SmartInvest are based on Finex’s financial autopilot, they give the same recommendations, and all their financial instruments are related to ETF Finex.

Roboadvising from Yandex and Sber analyzes the digital signature of the user on the Internet in order to better analyze the behavior of the user.

As a rule, Russian robots are not operated by the bank itself, but by a separate management company.Therefore, before choosing a robotic finance assistant, it is worth looking specifically at the information (usually in small print).

Advantages of using roboadvising

A variety of portfolios. Each such robot creates an investment strategy according to its own algorithm. After working with several services, you can get a large number of different portfolio options.

Simplicity. With roboadvising, you can become an investor without diving into the world of finance, studying the world economy and monitoring stock markets — all the analytical work is done by a robot, you only need to answer the questionnaire questions.

Save time. Since roboadvising allows you to always track the fate of your investment portfolio and collects recommendations for you, you do not need to constantly monitor the data. In addition, the robot is able to collect and analyze such an amount of information that the human brain simply cannot process..

Speed. You don't need to dive into the world of economics, choose an adviser for a long time and communicate with him — the robot will collect a suitable portfolio option in a few minutes (in the case of a live consultant, you will probably have to wait a few days).

Disadvantages of using roboadvising

Heterogeneity of stock composition. As a rule, Russian stocks and bonds dominate Russian roboadvisers: foreign securities account for no more than 20% in many services. In addition, many roboadvisers can recommend financial products only to the companies that own them. This reduces the number of options for creating a portfolio.

Poor quality of some robot advisors. Roboadvising is a fairly new phenomenon, so there is no clearly formed “gold standard” for the work of such programs yet. They differ greatly in quality and functionality: in some there are no calculations, no stock dynamics in the past — only a simple selection of investment portfolios and opening a bank account. Some Expert Advisors do not take into account such a factor as the level of risk, offering all users portfolios with shares. The use of such advisors will bring harm instead of benefit to a person who has no experience in investing.

Inflated expectations for profitability. Often, advising with the help of the program creates an overly optimistic forecast for the profitability of the portfolio: yes, it is written in small print that this is the expected return, but for an inexperienced investor this is practically a promise. In addition, it is not specified for how long such a yield can be obtained.

High commissions. In the Russian market, commissions are quite high, there is often a limit on the minimum amount per month – for example, at least 500 rubles. For an investor who has invested ₽100,000 (the minimum threshold amount in many programs), losing ₽6,000 per year on commissions is a huge expense. At the same time, roboadvisers are a product, as it were, for the middle class. Yes, of course, you can get a recommended portfolio from a roboadviser for free, and then assemble it yourself-but then there will be no automatic collection of the portfolio and regular rebalancing of shares.

The user's trust level is lower. It is no accident that in the premium versions of Western roboadvisers there is the possibility of financial consultations with a live expert: the level of trust in a living person will always be higher. A human expert can ask leading questions, offer more diverse options, and in addition, work with the worries and fears of the investor. Some of the client's preferences, as well as the vital importance of certain goals, will be understood only by a living person. You will not be able to have a heart-to-heart conversation and share your fears with the robot.

There is not enough data. Now the questionnaire on the basis of which your investment portfolio is selected is quite stingy: based on the requested data from 10-20 questions, it is very difficult to make a really effective individual strategy that fits behavioral patterns, goals and personality characteristics. Perhaps in the future there will be better ways to collect data.

Will roboadvising develop?

Robo advisors are a new phenomenon in the financial world. On the one hand, the successful experience of managing multibillion-dollar assets of users suggests that this is a working tool for novice investors. On the other hand, there is still no clear standard for the work of advisors, and this term often hides primitive assistant programs whose function is to advertise the bank's financial products and convince a potential client that investment is easy. And of course, the factor of trust — the opportunity to talk heart to heart, ask questions, discuss doubts — still makes it a priority to work with a living person.

Nevertheless, the prerequisites that we discussed at the beginning — automation, blurring of borders and, most importantly, a sharp increase in the number of investors in the world — have not gone away. Roboadvising is a product that is tailored for those who cannot yet afford the work of a financial adviser, but are already ready to invest. If there is a huge, constantly growing niche, then all the current difficulties and shortcomings are just an incentive for growth.

13 Sep 2021


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