Does anyone understand how robo-advisors work?


#1

I have been interested in robo-advisors - how to they work?


#2

The word robo-advisors probably gives the impression that these computers offer very sophisticated advice and investment strategies to investors.

I think this is not the case…

Users of wealth management apps normally enter in their goals and appetite for risk. The “robot” will then select a basket of funds which have historically performed in line with the users needs…

There are some flaws in the idea though:

• Past performance of marks has very little connection with future performance. The performance of the S&P 500 over the last twenty years will little connection to how it performs over the next twenty years.

• Passive investing strategies have flaws which people that are far smarter than me understand: http://www.zerohedge.com/news/2017-05-07/jack-bogle-warns-markets-will-fail-if-everyone-indexed (apologies for poor source!)

• A big part of wealth management is convincing the client that they shouldn’t sell during a market downturn. I doubt robots would be great at this!

In other words,… it is very tempting to think that we’re missing out on the next big thing by refusing to buy into robo-advisors, but I highly doubt it…