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Innovation Updated: 22 Aug 2017

"Robo-advisors democratize financial advice"

José Diego Alarcón is a partner of the Spanish SME Serfiex, which specializes in Financial Risk Management software, consulting and solutions. Along with a team of financial analysts, econometricians and IT specialists it has developed a robo advisor with which the company aims to approach small investors.

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What is the difference between a robo advisor and a financial advisor? 

One difference is that, thanks to the Internet, a robo advisor can advise many people while an individual obviously does not have the same capacity.

What does a robo-advisor contribute?

Our company has fundamentally developed a new approach to investing. The robo advisor is the tool that automates this methodology. The important thing is the methodology behind the robo advisor. It must be very detailed, very objective, nothing is left to intuition, it is a mathematical procedure. Our robo-advisor is characterized by both things. On the one hand, it builds an initial portfolio with potential losses. The second feature, which is the most important or most innovative, is it reconstructs the portfolio periodically and in an automated way, i.e. it rebalances it. Each month it compares the data, analyzes the expected profitability of the initial portfolio with the real profitability of the portfolio itself and based on that difference and the passage of time it recomposes and optimizes that portfolio. Without asking the customer for any new data.

Is it better or worse than an advisor?

It's no better or worse. Everything is simplified with the robo-advisor but it is no better or worse. As it is on the Internet, it can reach many people and democratizes such advisory services. It may be cheaper but the important thing is the methodology behind it.

What logic have you followed?

The process that we have followed after many years in this field has been to synthesize it as far as possible. We seek to advise a person with the smallest amount of information possible. We create a flow chart and define it following a methodology. Then the robo-advisor is the tool that implements it in a channel such as the Internet.

What minimum information do you ask the customer?

The customer is only asked to define his/her risk profile. There are two ways to do so. One, which is longer, is done with a questionnaire where the customer has to avoid getting into a loop as many times he/she thinks one thing, writes another and then his/her portfolio is not what he/she wants, has or can be. Another way, which is what we use, is more direct: we ask what potential losses the customer is uncomfortable with using a certain probability. The customer has his/her risk profile, they say for example they are uncomfortable with a 3% loss per year and we build a portfolio from that information.

What customers are you looking for?

We currently have large customers, pension plans, SICAVs, etc. The robo-advisor aims to attract customers with lower equity and who come through the Internet.

Is there interest in this service?

In Spain a bank has been interested in our software development, specifically the calculation engine part. Large Spanish investors have also approached us to ask about the methodology and we are going to present it in Mexico shortly. It's what we're seeing right now.

Do you have small customers?

No, currently only large customers.

What do you expect in the future?

In a few years I think all the major banks will have a robo-advisor for their young customers, who are accustomed to the Internet and want to make up their portfolio. People with low net worth that makes no sense for them to go to private banks. I trust that these large banks will contract the software, the calculation engine and provide a service to customers with low net worth, as is already happening in the United States.

Are wealthy customers not interested in that model?

Usually these people are older and they do not trust a robo-advisor. It's an automatic process and they prefer to speak with people. What's happening in the United States for example is that the children of those millionaires are approaching robo-advisors and obtaining higher returns. That's causing their parents to become interested in the people who have designed this robo-advisor; they want to know the methodology.

Are there any disadvantages?

A major danger is that it's not the same choosing between two people than between two robo-advisors. You can talk to people, ask them questions, you may have friends who have already placed their trust in those advisors or you follow your intuition; whereas if you go directly to a robo-advisor and you're not an expert in finance, you don't know the difference between a good and a bad one. You have no judgment and you have to wait quite a while to see the results and find out whether you were wrong or not. You may find that the algorithms are good but the products they are selling are very bad. You can have a good cook but if the raw material is bad, the result will be terrible.