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Mitsubishi UFJ Financial Group Inc. unveiled the 58-centimeter (23-inch) NAO humanoid robot in 2015 to improve services for customers in Japan and become the first bank in the world to use robots at branches. Photo: Bloomberg

Financial advice start-ups buying into algorithms

Automated services can trade, rebalance and minimise tax more cheaply than human adviser

AFP

When it comes to investment advice, would you trust a financial professional or a robot?

A growing number of people are choosing the latter, on the belief that algorithms can provide rational and dispassionate advice at a cost well below that of traditional advisers.

A handful of automated investment start-ups created in the past few years now have more than US$4 billion in assets under management, according to Forrester Research.

It's a small segment of a trillion-dollar wealth management industry but growing at a red-hot pace, Forrester analyst Bill Doyle said.

"This is a more meaningful crop of disruptors than we've seen for many years, really since the internet brokerages emerged," he said.

Doyle said the digital investment services appealed to young adults who lack the minimum -- often US$100,000 to US$1 million - for traditional wealth managers, but who want advice or management of their investments.

Robo-adviser firms often allow customers to set their preferences and let the algorithm do the rest - trading, rebalancing and minimising taxes.

Costs are often far less than a traditional advisory firm, which may charge one per cent or more of a customer's assets.

"These upstarts have simple uncomplicated offers, often for markets that are not being served effectively by incumbent firms," Doyle said.

On the Bogleheads investment forum, one contributor claimed to be happy with the "low fees with a lot of added value" at one firm and the "Silicon Valley viewpoint on investing".

Wealthfront, the largest of the new breed, announced this month it had reached US$2 billion in assets under management in just over three years.

The strategy is based on the idea that "active" managers rarely outperform over the long term a broad index such as the Standard & Poor's 500, especially when manager fees are included.

These firms mainly recommend exchange-traded funds (ETFs) that offer these blends of assets.

"Investors are sick of the lack of transparency from traditional financial services," Wealthfront chief executive Adam Nash said in a blog post.

"For too long, this industry has made too much of its revenue on the backs of those who can least afford it."

Other start-ups including Betterment and FutureAdvisor use a similar formula - turning over daily portfolio management to an automated algorithm that selects investments based on a customer's risk profile, age and other factors, in an effort replicate broad market returns.

"More people are searching for a technology-first automated solution," said Betterment's Joe Ziemer.

The New York start-up launched in 2010 now has 73,000 customers and US$1.6 billion under management.

Betterment's average customer is 36 years old but its fastest growing segment is people over 50.

The mainstream financial industry has taken notice.

The large investment firm Charles Schwab this month launched its 'Intelligent Portfolios', using a similar method, without any fees beyond the underlying investment fund costs.

Schwab is likely to quickly overtake the "pure play" automated firms but won't put them out of business, according to Doyle.

"Schwab's entry will raise this whole market. It brings credibility to this model," Doyle said.

This article appeared in the South China Morning Post print edition as: Financial advice start-ups buying into algorithms
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