The fintech arena has recently been a huge talking point for the investment management industry (see our recent Blog), yet one specific area that seems to have taken the lead in peaking the interest of institutional investors is the ‘Robo’ space. The relentless and fast paced advancements in the fintech arena have created a fierce pool of competition driving fees down and forcing innovators to come up with quicker, better and more responsive ways of delivering service – and so enters the Robo-advisor.
What is a Robo advisor?
“Robo-advisor” is the name given to a fast emerging new breed of financial advisors. It is a somewhat difficult term to fully define as it covers a wide range of services, yet in its most simplistic form a Robo-advisor provides automated investment management solutions supporting the allocation of funds between different asset classes. The difference between a Robo-advisor and a traditional financial planner is that the Robo-advisor offers portfolio management bundled with distribution, based on algorithms. It is an online service that removes face to face advising and delivers automated guidance for investors looking to access the market and benefit from a low fee method.
The huge and rapid advancements in computer technology that have emerged over the past two decades have not only meant that using the internet is a responsive and pleasant experience, but also that it has become an integral part of almost every business and industry worldwide; with around 40% of the world’s population now using the internet, compared with just 1% in 1995.
With so much of our lives imbedded within technology it seems almost inevitable that the computer technology revolution now brings us this new class of automated services in investment management. Whilst the average age of an investor creeps ever downward, managers are beginning to seriously consider these technologies in a bid to remain current and position themselves as an attractive investment opportunity to Millennials. ‘Generation Z’ is predicted to make up 60% of the world’s global workforce by 2020, so it is perhaps not a coincidence that they are becoming increasingly influential in the way businesses shape their technology offerings. In the investment management industry this translates to the hype we are now seeing around the Robo sector.
The emergence of the Robo-advisor has indeed already started to affect margins for investment managers across the globe, with notable changes becoming apparent in regards to how companies are investing and managing illiquid assets. As part of this same change, the systematic hedge fund space has advanced in leaps and bounds by using the same technology and through the introduction of Artificial Intelligence (also known as ‘self learning’ algorithms) to predict and forecast trends.
Where did it all begin?
Computers are by far one of the most important inventions in our history. Arguably the Robo-advisor sector began its birth when pioneers for technology in the investment management industry began utilising their existing knowledge of financial markets (alongside their experience in investing in stocks and shares) to leverage the use of technology via the internet. People began to utilise licensed software packages to tap into a large amount of data and access vast numbers of potential clients; as processors became more powerful, computers were able to process this data in a much shorter period of time.
Soon the social media revolution began to shape the use of technology and these technology-backed automated platform advisors were built during this advancement alongside the constant evolution of user interfaces. Users were then able to enhance the way in which data is viewed and processed such as through implementing a set of goals, or in effect teaching the computer to identify similar patterns or scenarios by dividing the approach into subfields. The techniques that have been developed are not that different to how we, as humans, approach problems on a day to day basis, yet the Robo-advisor can operate without the burden of human emotion or distraction therefore providing a consistent and uniformed approach in turn delivering more reliable results. True Robo-advisors emerged predominantly in the US, with firms such as Wealthfront and Bettermet (who between them manage around $6.5bn USD) yet the rest of the world is now also seeing a surge in Robo solutions.
We spoke to Stuart Stark, Head of Operations at Emerging Asset Management (“EAM”), about his experience with Robo technologies. [EAM delivers an innovative turnkey platform to start up asset managers around the world: www.eam.bm]
“I have been interested in the Robo space for relatively long time. Several years ago I worked for a leading fund management company in Jersey, back then if you wanted to place a trade you had to call someone and ask for a quote. As you can imagine, by the time you got hold of the right person and said what you needed to say… the price would have changed. Price movements most of the time were slower and it was a different type of volatility.
Things began to change when the company I worked for was bought by a large US based insurance firm. In the 12 months that followed the company saw endless amounts of procedures introduced teamed with checklists, something that felt like a frustrating burden at the time. Although these changes weren’t exactly welcomed initially, soon enough (and as a direct result) we started to see a reduction in dealing errors and consistent hits on our cut off times. In-fact, we had become so slick with the introduction of automated reconciliations and dealing block switches I began to feel that if technology was used in a controlled and organized manner, it was by far much better at us doing these types of repetitive jobs.
I did some research and came across a new technology, a computer program that was scientifically proven to boost a 70% hit rate on good trades. What I found especially interesting was the concept of a computer outperforming a human in investing. After a few failed attempts and some serious lessons learned, I developed my own algorithm using predictive data. Figuring out the Robo space has been a long and somewhat painful experience for me but it is now my opinion that in order to succeed in difficult and unpredictable market environments, a systematic and non-emotional approach produced consistent results. The moment I became emotionally involved or attempted to boost my ego, it all basically fell apart. My view somewhat echo’s the behaviour of the big banks with regards to Robo technologies… If you can’t beat them, join them. I still find it strange sometimes that a computer taught me this valuable lesson in life.”
The next major advancement we are seeing is the exploration of ‘Quantum computing’. At a cost of around $10m per computer, serious investment is certainly required. The technology is really still in its infancy and experiments still being carried out, yet the commitment of various national governments, military agencies and institutional powerhouses such as Goldman Sachs to funding the development of this type of computer is perhaps indicative of how disruptive the technology will be when it comes to fruition.
Quantum technology is hugely complicated, yet if it can be made to work the major advantage for Robo-advisors will be the dramatic processing power available; using quantum technology will enable computers to solve even more complex issues at an extraordinary speed that far surpasses the capabilities of today’s most powerful conventional computers. Clearly the physical advancements of technology are huge, and the momentum toward technology based investing is accelerating.
Robo-advisors do present an interesting opportunity both in terms of innovation and in ensuring fair and transparent pricing. In a market where fee sensitivity is paramount, the online automated guidance offered by Robo-advisors can be appealing and with the likes of Fidelity Investments, one of the world’s largest mutual funds, announcing the implementation of a digital strategy and Robo-adviser in the last few days (the Fidelity Automated Managed Platform)… this trends doesn’t look set to fade away.
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