Robots taking over the world might sound like a futuristic nightmare straight out of a Hollywood flick. But robots helping you make money? Over the last decade, robots — or rather, sophisticated computer algorithms — have shaken up the financial world and democratised investing. Now not just the affluent with access to professional financial advisers — plus thousands of dirhams to spare — can think of wealth management, even millennials with a few dirhams in their pocket can dabble in investments.
StrategyR, in its recent Robo Advisory – Global Market Trajectory & Analytics report, estimates that the global market for robo advisory was worth $2.6 trillion in 2020, and is likely to jump to $6.2 trillion by 2027, growing at a CAGR of 13.5 per cent from 2020-27. So why are robo advisers such a big hit? Well, here are five reasons why they have become the preferred choice for many investors.
Diversification and the sheer scale of it
Comarch, a leading financial services firm, observes that as the number of investment products available for purchase increases every year, it may create problems for both the investor and the adviser. “The former can get lost in numerous options and refrain from taking any action. The latter may not advise properly — even having specific asset allocation in mind — because it is almost impossible to track every instrument which meets the initial client’s criteria,” says Neha Goel, Sales Director at Comarch Financial Services, Middle East
But in the world of investments, “choosing the right product at the right time can make all the difference and determine success or failure”, says Neha Goel. Here, algorithms have the distinct advantage of being able to keep track of, and process, vast amounts of data that would be beyond the capacity of a human financial adviser.
To test if algorithms can really give sound advice, Comarch gathered macro indicators of major global economies, commodities prices, FX rates and major indexes quotations. Then it employed price history for over 4,000 mutual funds, traded both locally and globally, on Nasdaq. For measuring the results, it came up with a top-bottom analysis. In the analysed group, it created a ranking of mutual funds, sorted by the probability of achieving the highest rate of return in the next quarter.
Comarch then moved months in the future and checked whether the top 10 per cent was significantly better than the bottom 10 per cent from its ranking. In 4 out of 5 cases, Comarch could predict which funds would score a higher rate of return. Moreover, the difference in rate of return between top and bottom funds amounted to 2.99 percentage points quarterly. “In other words, adviser choosing products for their client from available product universe for one-year period, could count on 12.51 percentage points better returns with the algorithm, no matter how the markets perform,” says Prem Drzymała, EVP of Global Sales, EMEA, Financial Services Sector at Comarch
Low fees and accessibility
Robo advisers quickly crunch the numbers, spread the risks, and deliver an optimal investment plan that is almost guaranteed to work. You do not need to know the 101 of investing or the vagaries of the market — the robo advisor will ask you a few questions about your goals and appetite for risk, and then get you up and investing within minutes. Also, while human investment advisers typically charge 1 to 2 per cent of the portfolio value, robo advisers can be had for just an eight of that cost — 0.25 to 0.50 per cent of portfolio value. Besides, many robo advisory services work with low balances – in some cases do not even demand minimum balances — making them accessible to a wider swath of investors. Even better, they are typically just a smartphone app away and can be reached any time.
Automated portfolio rebalancing
Over time, your portfolio tends to stray away from your initial investment strategy. It needs to be regularly rebalanced for it to stay at the appropriate risk levels for your goals. This is a tedious and time-consuming process, even for an expert financial advisor. Robo-advisers automatically rebalance your portfolio so that it always stays within your target asset allocation. They can also automate tax loss harvesting, which offsets taxable capital gains by selling funds that have losses. This keeps the asset allocation constant, reducing taxes and improving returns.
Emotions are bad news when it comes to investing! They tend to cloud your judgement and foist subpar decisions on you — a 2018 study in the Journal of Financial Planning found that investors who removed emotion from their decision-making saw up to 23 per cent higher returns over 10 years. Well, with robot advisErs, emotions are the last thing you need to worry about, since these algorithms are based on sound, long-term strategies that are impervious to passing market fads or fears.