what is it and how does it work?

what is it and how does it work?

the robotic advisor, also called robot advisor or robot-investor in French, is a technology that appeared in the United States in the late 2000s. The goal? Use theartificial intelligence develop algorithms that can provide personalized financial advice and manage your financial investments.

At the crossroads of technology and human experience, will the robot advisor become the personal finance revolution?

Robo-advisor: a definition

A robo-advisor is a management system automated walletwhich uses algorithms to:

  • Arbitrating alone the allocation of the client’s assets (management by mandate);
  • Or advise customers on trade-offs based on their profile (handling recommended).

Whichever option is chosen, the robo-advisor’s mission is to optimize the return / risk ratio of his client’s portfolio.

In the United States, two players share the market: Improvement And Wealth.

In France, where this technology was most recently installed, robo-advisors now offer a hybrid model, between algorithms and human advice. They are generally integrated into alife insurance (See here a detailed comparison).

How does the robo-advisor work?

The robo-advisor is based on the answers provided by the customer to a series of questions. They aim to define it risk profile. This is called profiling. This step is important. It allows the robot to determine the client’s financial goals, investment horizon and loss risk sensitivity.

Please note that profiling is made mandatory by the European directive MiFID II. If the platform you are using does not offer it, move away immediately.

Once the customer profile is established, the robotic advisor will offer several placements. It is possible to modify these preliminary arbitrations, and to follow the robot’s proposal or not. Depending on the option chosen (mandated management or recommended management), the robo-advisor then carries out arbitrations on the client’s portfolio. To do this, it is based on several elements:

  • The most suitable means (this is generally life insurance, but some players also offer to invest in a PEA, PER or even a stock account);
  • Risk sensitivity the client and his investment horizon (short, medium or long term);
  • Investment funds proposed;
  • Fluctuations stock markets.

What are the advantages of the robo-advisor?

  • First benefit, and last but not least: robo-advisors are cheap and sometimes even free. They are therefore much more accessible than an asset management consultant. In addition, they mainly invest through EF (Exchange Traded Funds), investment funds consisting of stocks and bonds that track the price of a stock market index. However, ETFs are on average 5 times cheaper than conventional UCITS.
  • Subsequently, the technology implemented by the robo-advisors allows to democratize the advice through wealth management. It makes it accessible to everyone. Beginner investors therefore have a means to get started without stress or excessive risk-taking.
  • Furthermore, the robot-investor relies solely on algorithms. It is not subject to the prejudices or emotions of retail investors. Because of their behavior and reactions, they are likely to make bad decisions.
  • Finally, all robo-advisors offer a system of portfolio monitoring. It allows investors to monitor their investments on a daily basis. They can change their profile if they want to take more risks.

What are the disadvantages of the robo-advisor?

  • Like all technologies, robot investors have their flaws. Hence the report IOSCO Research Report on Financial Technologies (Fintech) of 2017 shows that there is risk of error in the algorithms used. The financial investment advice provided by the robo-advisor would therefore only be relevant if it takes into account a sufficient number of client characteristics. If not, your proposals may not be adequate.
  • Furthermore, it is currently difficult to judge the performance of robo-advisors. They have been in the financial landscape for too little time. What will happen in critical situations, for example if a collapse of the stock market occurs? Can we fully trust them?
  • Finally, we can highlight the fact that robo-advisors lack an obvious human dimension. Some clients (especially novice investors) may need it. Using such a service saves real time, but doesn’t actually allow you to educate yourself financially.

And after: will your portfolio soon be managed by a robot?

What future for this technology that automatically manages portfolios? Will it one day replace the human hand? In France, only a few operators offer automated management offers and the advice provided is not yet on par with that of wealth managers.

For the time being, with less than 100 million unpaid and fewer than 7,000 customers, the French market robo-advisors remains fairly confidential. Which doesn’t mean it won’t grow in the years to come.

One drawback, however: second a recent report by the NGO Better Financerobo-advisor algorithms lack accuracy, which means that according to the offers, two investors with the same risk profile will not get the same distribution of their assets… nor, in fact, the same financial performance.

However, this controlled management technology has very specific interests. It is affordable, perfectly suited to inexperienced and / or time-constrained investors, and most importantly inexpensive. And if we can deplore the absence of a human dimension (difficult, for example, to ask questions or investigate a topic with a robo-advisor), we can also imagine a third way, which would be a hybrid between the respective strengths of financial advisors. humans and robo-advisors.

Provided that the algorithms used are perfected, it is possible that in a few years we will see the birth of investment robots that combine a deep knowledge of the client and his situation, and analytical skills and computing power to build a optimized financial strategy.

Finally, in the current economic and ecological contextL’impact of investments it is a very important topic. You can also bet on a financial strategy responsible and sustainable savings.

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