Robo-advice: technology over judgement?

We live in a world focused on convenience and cost. Companies like Amazon have raised the bar on price transparency and consumer expectations and have shaped our shopping habits over the last decade in a manner few would have predicted. This effective use of the internet and smartphones has disrupted the traditional retail model, leaving many casualties along the way, and now this use of technology is also bringing greater choice for customers in the financial industry. While more choice and competition can only be good for the consumer, will ‘robo-advisory’ services, which are increasingly being used by individuals transitioning from their DC schemes into retirement, provide an optimal investment solution in a challenging and rapidly changing investment environment?

A convenient, low-cost solution?

In recent years, we have seen a proliferation of startups as well as established firms open up robo-advisory businesses in a bid to be ahead of the curve. The term ‘robo-advice’ encompasses a wide range of products and solutions that range in sophistication. From basic algorithms that take into account a client’s age, gender, assets and income, to the more complex tools that consider the ability and willingness of an individual to take risks, robo-advisory products are aiming to provide clients with attractive investment returns at lower costs than the traditional model. What is not to like about a product that is embracing technology to provide individuals with a lower-cost, convenient solution?

While all forms of robo-advice use algorithms that are based on past experiences, we have all heeded the warning that past performance is not an indicator of future returns. This is likely to be truer today than in any past period as we have been through an extended period of extraordinary monetary policy, the ultimate consequences of which are still unknown. We have seen a dislocation between asset prices and economic growth and, with bond yields close to all-time lows, the traditionally low-risk investments of government bonds are potentially riskier than ever. In addition, with volatility at historic lows and asset-class correlations high, the need for good judgement over algorithms is more pertinent than ever before.

A people business

In such times, we think that selecting investments on account of their fundamental value, as well as being transparent and flexible, is important. Crucially, it is our belief that knowing what you own and why you own it is paramount in producing sustainable long-term returns for DC pensions and beyond – more so than a ‘cookie-cutter’ approach. This, coupled with the personalised knowledge of a client’s individual circumstances offered by face-to-face contact, should enable a more rounded assessment to be made about when to focus on income, when to take risk or when to draw down. After all, this is a people business – for people, by people.

Authors

Bhavin Shah

Portfolio manager, multi-asset team