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Innovation 19 Aug 2015

Could we have robots instead of financial advisors?

Could a robot manage my money? Without a financial advisor acting as an intermediary? Little by little so-called robo-advisors are changing the way money is being moved in the US and are beginning to reach Europe. This model means customers do not need financial advisors. They just have to turn on their computer and fill out a questionnaire. Customers report their risk tolerance, goals and investment and their money is managed automatically.

A model that, according to the consultant from GVC Gaesco Albert Enguix, has experienced “spectacular growth of around 10 to 15% increase each year in the US. Around 73,000 customers have contracted these services with a volume of 14 billion euros in assets under management at the end of 2014. This figure is expected to rise further. ” Enguix explains that the model guarantees “absolute return investments. It sets controlling return and risks as its goals”. Through ‘robo-advisors’ investment portfolios of customers who move amounts of between $50,000 to $100,000 can be controlled.” The money is invested in EFTs (Exchange-Traded Funds) and volatility is controlled; the goal is absolute return. This is about making portfolios under the famous VVMSQ – volatility-value-momentum-size and quality of the composition of the holding”, explains Enguix.

The advisor stressed that the process is very simple, “You access the platform from your computer in the same way as if you wanted to make a transfer. Analysts, statisticians and economists have created financial strategy models beforehand using thousands of pieces of data. Algorithms and statistics to design programs that manage your money.” What are the risks? “The same as in the traditional market. Machines cannot foresee a financial crash. They cannot guess the psychological component that can change the entire financial picture of a market in minutes just as advisors are unable to do so. It’s not an exact science,” Enguix explained who added that with this type of platform companies “save costs by not having to hire financial advisors”.

Customer profile

The profile of customers who opt for this technology to move their money “is around 35 years old and with a high purchasing power,” Enguix explained. The millennial generation uses this model the most. The end result is similar to what a traditional consultant would do for them but at a lower cost. The US consulting firm AT Kearney said that “these services will become a trend over a period of three to five years,” according to this article from Bloomberg. In 2020, robo-advisors will control 5.6% of investment assets in the US. The figure is currently around 0.5%.

According to Adam Nash, CEO of Wealthfront, a firm that manages more than $2.4 billion in assets, “rather than the investment world being a sprint, it is like a marathon and robots don’t need to sleep. They can make their calculations and movements while analyzing all markets whatever the time.” A new model that also confronts “the collapse of commission prices”, which is stressed from Wealthfront. The firm is convinced that future generations and technology will revolutionize the financial market: “The preferences of younger consumers have a huge impact on financial services and companies will have to respond quickly to new trends.”

Arrival in Europe

In Europe, this model is being incorporated extremely slowly. “We are lagging behind the US, which is 10 years ahead on this type of service,” says Enguix. In France, Germany and Switzerland some companies such as the German firm Vaamo or the French firm Advize have launched in this market. “Although there is still a long way to go to reach customers en mass in Spain and Europe. Many professionals in the sector have never even heard of robo-advisors. There is a long road ahead,” says the consultant from Gaesco.

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