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Machines vs humans: is there a clear winner?


by Tommaso Motta

Robo-Advisors: how to provide automated financial guidelines

The evolution of artificial intelligence brought several innovations, that, with the new fintech trend, are now being applied also to finance. In particular, a great novelty is represented by a new way of providing financial advisory services to customers. Since financial advisors can be very expensive and not accessible to people that do not have considerable capital to invest, some players came up with virtual financial advisors that can give excellent support to investors at very reasonable prices. The so called “Robo-advisors” are complex software that provide financial services with minimal human intervention. Those platforms use machine learning algorithms that are able to collect data and information from clients and give personalized advice on financial investments. They customize your portfolio by exanimating investor’s personal data and investment goals. 

Online investment advice was born in late 1990s, but robo-advisors started to spread around 2010. There are currently many robo-advisory service providers that manage around 180 billion dollars. The adult population, which control the majority of the wealth in the world, rely mostly on human advisors and experts to help them decide how to invest and what to do with their money. New generations are more inclined to use online services than older generation, this is why robo-advisor will definitely spread in the next future. 

Big investing firms are now creating their own robo-advisor platform, trying to catch younger customers.

Companies like FinScience are developing their platforms to provide low-priced financial consulting services.

FinScience’s Alternative Data Intelligence is a software that can discover new investments opportunities by analyzing huge amount of “Alternative Data”, through proprietary AI algorithms and human experience. Those kinds of products give information to generate investments ideas that nobody has, that’s why many professional and individual investors are starting to use them to boost investments performance.

FinScience applied the artificial intelligence to the Quantamental Investing. This new methodology combines a quantitative (based on measurable and objective data) approach to investing with a fundamental one (based on subjective knowledge of the companies). Those technologies can be used by virtual advisors to support investors with a variety of advanced information that can make the difference between a bad and a good investment strategy.

How do robo-advisors work?

The algorithms behind online advisors are able to create autonomously portfolios of investments personalized for each individual costumer, just like a human professional. After the investment is set up, the software worries about rebalancing the asset, following the instruction given at the beginning. Typically, the customer can choose the level of risk he is willing to take and the economic return he aspires to obtain, and the algorithm allocate the assets consequently.

The first decision the software take is the percentage of stocks and the percentage of bonds that the portfolio will contain.

The next step is to choose the asset to buy. Usually robo-advisors tend to use index funds, because they provide good diversification at a very low price. Other parameters are geographic regions, sectors and the development of the countries that every index fund follow.

Once the algorithm finds the best solution for a particular costumer, it invests automatically the amount disposed. When the portfolio is too unbalanced, the platform sells and buys assets to bring it back to the initial proportions.

What are the benefits of virtual advice?

Robo-advisors offer a good service to customer that want to save in terms of costs and want to achieve their goals in a medium or long term. Another peculiarity of this new typology of financial advice is the possibility to invest even just a few amounts of money, so even people that do not dispose of great capitals can benefit from good advice. Unlike human financial advisors, a virtual advisor is always available via online platforms, so the user can consult it when he needs it, without time restrictions.

Another advantage is efficiency. When an investor wants to execute a trade, he does not have to reach and talk to a financial advisor, he can just log into the virtual advisor platform and make his investments on his computer, comfortably at home.

A key advantage is also the almost total absence of human emotions in the process of creating and managing a financial portfolio. Many researches state that the natural human emotional component is deleterious for trading and investing, for the fact that it can bring the investor to make wrong decisions because of short term volatility. A medium- or long-term investor must eliminate completely this component to achieve his goals, this is why online advisors are the perfect solution for them.

An investments strategy that has proven successful in the past is the dollar cost averaging. It consists in investing the same amount of money in an asset at regular intervals. This methodology aims to reduce volatility and benefit from the long-term growth of the stock market. Robo-advisors allows investors to set automatic investments plan (AIP) that automatically invest in a pre-set portfolio every month or week.

What are the risks of virtual advice?

Since virtual advisors choose which funds will be added to the portfolio, investors have very limited control over their investments. This can be positive, because it limits the investor’s emotional involvement; but also, negative, because it reduces the options that the investor has available.

Sometimes, investors may want to take advantage of stocks that are undervalued in the market. Unfortunately, robo-advisors are not yet capable of supporting investors in a stock picking strategy, but in the future, with the development of artificial intelligence and machine learning thinks could change. 

Another disadvantage of virtual advisors is the lack of human relationship which instead a real advisor can give, that, for most investors, is a crucial aspect when it comes to their savings.

Lastly, robo-advisors are not yet fully customizable, but that is a little price to pay to benefit from the low cost they require and the availability they offer.