Within the next five years Financial ‘robo-advisers’ will revolutionise the investment advice industry.
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Algorithms
In many ways it has already happened. According to Bloomberg: In 2015, providers of automated investment services, or ‘robo-advisers’, invested a total of $50 billion in the US. Similar services are also available in the UK, and it is only a matter of time before they start to challenge the established investment houses for real market-share.
Due to the use of algorithms instead of human advisors, these services are much cheaper than the ones offered by traditional investment houses. In most cases under half the price.
Not just pocket-change
The early view was that ‘robo-advisers’ would only appeal to small-time investors who couldn’t afford to engage the competency of a real human, working for a prestigious investment firm.
But Bloomberg’s numbers from the US is showing that big-time investors are placing significant assets using ‘robots’ too.
And for obvious reasons. A well-written and executed algorithm is able to process information of a whole other order of magnitude than an individual working from experience and intuition.
(Traditional financial advisers have also been relying on data models to deliver returns for their clients, but the new ‘robo-advisers’ are taking it to a new level).
The efficient market theory
One of the big believers and inspiring minds behind the financial robo-revolution is Burton Malkiel, author of the book A Random Walk Down Wall Street, now in its 11th revised edition.
Malkiel, who is a Professor of Economics, Emeritus, at Princeton, is known for what he calls the ‘efficient market theory’, which states that you are better off placing money across the breadth of the market and sit tight thorough its ups and downs, instead of trying to bet on single stocks and time your ins and outs.
The efficient market theory lends itself well to financial algorithmic modelling, as all the historical market data can be used to predict a certain type of risk investment across a whole range of sectors and types of funds.
Wealthfront – a short case-study
Malkiel is also today Chief Investment Officer at Wealthfront, one of the US’s most successful providers of automated investment services.
What makes Wealthfront remarkable, compared to a traditional investment house or a large bank, is that it runs very much like a Silicon Valley tech company, with a heavy focus on attracting and nurturing the best engineers and coders money can buy.
It is very up-front about its investment methodology, posting a long white paper on the topic, as well as running a tech blog for anyone who is interested in what the engineers are up to at any time.
In many ways it’s the geek’s victory over the jocks, showing that the world is run by brains and applied science these days (as opposed to men in flashy pin-stripe suits, going on a hunch).
The Guardian has recently posted a good overview on the state of ‘robo-advisers’ affairs in the UK focusing amongst others on the company called Nutmeg.
The banks are moving
The big banks in the US are set to introduce their own ‘robo-adviser’ services this year, if they haven’t already done so, like Schwab Intelligent Portfolios.
And long-term, the investment robots will inevitably force a complete restructuring of the whole banking industry.
Paying premium to talk to a human, who will then simply use a computer to do the job you could’ve done yourself, will no longer be accepted.
Bankers of the world should be very worried.
Want to find out more about how robots are changing our world? Make sure you sign up to the Robots at Work event in March and join your peers for a lively debate on the matter.