Robo-advisors have been around since 2008 when Betterment launched its first robo-advisor. A lot has changed since then, both in the stock markets and in the sheer number of robo-advisors, which has increased exponentially all around the world. The ever-growing digital space has played a significant role in driving this, along with the significant increase in the number of people who have access to a smart phone.
Here in South Africa we have a couple of our own robo-advisors. This week we learnt more about what robo-advice is from Grant Locke, MD of CN&CO partnter OUTvest , in a Biznews podcast interview with Alec Hogg. We still have a lot to learn about the robo-advice space as it continues to develop. It was great to hear more about the finer mechanics of OUTvest and how the robo-advisor provides investors with advice using algorithms and loads of data. Our biggest take away from the Biznews interview was that OUTvest uses a hybrid robo-advice model, which means a human advisor oversees the final step in your investment fund selection.
Algorithms and data form a key part of a robo-advisor. Grant explained how OUTvest uses algorithms to provide investment advice.
“An algorithm is effectively, a formula,” he said. “It’s a system that takes a couple of inputs and provides an output. We don’t use artificial intelligence in our system at the moment. It’s what’s called deterministic. So, every single input is mapped to an output. We do it this way to keep it simple and also because we’ve got to be very careful that we are able to show, at all times, how a client got into a portfolio.”
Take a couple of minutes and listen to the full interview.
By using algorithms, robo-advisors are able to reduce the complexity for the investor, therefore making the investment process far more manageable. Sasha Planting explains in her Moneyweb Investor article “Robos to the rescue”:
“When US investment firm StateStreet introduced the first ETFs in 1993, they were touted as the simplest and most cost-effective way for the average investor to access the market.” Fast forward 15 years and the ETF and index world has become extremely crowded. Investors are spoilt for choice!
Read the full article from Sasha here and determine for yourself if you think that “robos” are indeed coming to the rescue.