Would you trust a robot with your investments?
There has been a lot of recent discussion about the use of robots for… er… intimacy, with a great division of opinion on the topic. But another area that’s getting just as much attention in the investment community is whether you should be trusting robots in an equally personal area – with your finances. The rise of robo-advisors has meant that brokers are getting the support of artificial intelligence in selecting clients’ shares or funds, and in some cases, people are engaging directly with these platforms online to manage their investment portfolios.
We’ve taken a look at what robo-advisors are, whether they really know what they’re doing and if they are the most trustworthy or affordable “people” to be managing your investments for you.
According to Investopedia, a robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the intervention of human financial planners. Generally speaking, robo-advisors use the same software as human financial advisors do, using an algorithm to match people’s answers to questions about acceptable risks and terms of investment with a suitable portfolio.
Users log into their robo-advisor of choice online (there is a list of South African options later on in this article), and answer questions about risk and term to set up their portfolios. They can adjust their responses at a later date if their circumstances or requirements change. The robo-advisor then selects a spread of investment funds from those in the market that they are affiliated with, and creates a portfolio for its client.
A key component of true robo-advisors is that they don’t only focus on establishing the initial investment portfolio, but continue to adjust this portfolio in response to changing and anticipated market conditions.
The biggest benefit of robo-advisors is that they cost less than traditional financial advisors. Since there’s no salary to be paid to a robo-advisor, the saving in overheads gets passed on to the investor in reduced fees.
An additional benefit, for people who feel comfortable interacting with computers, is that they can do so in their own time, rather than having to make an appointment during business hours. For this reason, robo-advisors are very appealing to the millennial market.
If you want reassurance or insight, your robo-advisor isn’t going to hold your hand.
There is no human element to the interaction; you get an automated response that delivers on your requirements. In many cases, this is all that you need – but if you want reassurance or insight, your robo-advisor isn’t going to hold your hand.
It is often beneficial to look at the whole picture rather than just your investment needs when making financial decisions, but robo-advisors do not get involved in the broader aspects of wealth management, such as estate planning, taxes or insurance products. However, you could use a robo-advisor for investments, and an informed human advisor for other aspects of your financial planning.
The argument about whether algorithms are as effective as human beings at making strategic decisions has been hotly debated for decades. A good test of this is whether a computer can beat a person at a game of chess. The answer is clear – only a handful of players alive today have any chance against a computer. The ability of artificial intelligence to run multiple scenarios simultaneously, taking all variables into account, makes them very effective strategists indeed – in chess and in financial planning.
In fact, many robo-advisors predicted the market turmoil that ensued earlier this year as a result of Britain’s Brexit vote – a scenario that many financial planners simply didn’t see coming – and saved their clients lots of money with prudent investments both before and after the announcement.
A recent article by Moneyweb compared the three major robo-advisor platforms on the market in South Africa today. These are: SmartRand, Bizank and Sygnia RoboAdvisor – all of which have different benefits, investment fund options and fee structures. According to Moneyweb’s Hilton Tarrant, “All three are very simple to understand and use, with well explained step-by-step processes. They all attempt to illustrate how much you’d need to save to reach a (given) goal as well as expected returns.”
More recently, Sanlam Investments entered the robo-advisor market with Sanlam Smart Invest, which has online tools designed to help investors find the right combination of funds based on their goals and contributions. Beanstalk and SIPP are other similar platforms, but Tarrant says that only SmartRand, Bizank and Sygnia RoboAdvisor offer actual automated rebalancing of portfolios – instead of just setting them up based on your goals at the outset.
Robo-advisors are cheap and effective investing tools – and their advice can be used with as much confidence as that coming from a financial advisor. In fact, many financial advisors are probably using some kind of algorithm-based product to set up your investment portfolio anyway.
However, many people simply aren’t ready to hand the control of their portfolios over from people to machines – and they also don’t want to miss out on the benefits of having their broader financial needs met by a single person, so it seems unlikely that robo-advisors are poised to take over the world just yet.
If the idea of working with artificial intelligence to plan your investments appeals to you, why not try one of the South African options? They require either a lump sum of R5 000 to R10 000, or a monthly debit of R500 to R1 000. It’s time to get personal with a robot.