Stop talking about robo-advisors, let’s start talking about smart investing.
I recently had the opportunity to learn that, according to Business Insider, the definition of “robo-advisors”, first appeared in a March 2002 article by Richard J. Koreto published in “Financial Planning” magazine.
Good to know, now I have someone to blame for such a freakish and contentious definition!
The expression “robo-advisory”, commonly used to define automated advisory, recalls to mind a somewhat dumb investment methodology, a kind of approach that my partner Raffaele Zenti would define “monkey portfolios” , on the back of a very famous experiment of 100 monkeys throwing darts at the stock pages in a newspaper and outperforming the market.
As a matter of fact, digital advisory provides a great opportunity for reducing the asymmetric information characterizing financial markets. As we all know, the web, if properly used, is a powerful instrument for democratizing information and foster collective learning.
Most of the times, robo-advisors provide nice and user friendly interfaces, but the underlying mechanisms behind the advised solution, are a kind of “black-box” and the level of financial insight provided is quite poor.
When talking about money and investment the concept of trust is king. Trust is a strange dimension, you spend years to earn it and with one single mistake you can lose it in minutes. The idea of trust in finance is closely linked to the idea of reliability.
Most robo-advisors focus on the mean-variance approach, on the back of the so called “Modern Portfolio Theory” , pioneered in a paper by H. Markowitz in 1952, assuming that is possible to construct an efficient frontier of optimal investment portfolios offering the maximum possible expected return for a given level of risk.
The positive side is that MPT suggest that risk is an inherent part of return, which is true. On the other side, apart from being not modern at all (the paper was written in 1952!) this approach is too simplistic in representing the reality of financial markets that is very dynamic and heavily influenced by social and psychological factors that are ever-moving.
The chances that robo advisors will have a very bad time when the next black swan will happen, looks quite high, and the effects will by amplified by the absence of a physical advisor to blame.
I believe that the opportunity in democratizing risk management and generate better investing behaviour is providing investors with an “educational” transparency that foster investing awareness.
The value proposition of AdviseOnly is characterized by a high level of transparency for investors that we accomplish by exposing non conventional portfolio metrics.
Risk Forecast. The right question you should ask yourself, when investing is not “how much do I want to make?”, but rather “how much am I ready to loose?”. That’s why we provide indicators such as the Maximum Drawdown (the maximum loss expected over the next month) , the Var 1%, (how much is the loss that you can expect in just 1% of the cases) or the Shortfall Probability (probability to get negative return in one month).
Diversification Index. Diversification is a well known concept and is probably the first “safety belt” of any investment portfolio. We decided to quantify it designing a proprietary measure that takes into account asset classes both at a macro, and micro level, different issuers or risk counterparties, and single financial instruments.
Liquidity. Liquidity is an important metric that quantifies the possibility of buying or selling a financial instrument on the market without an impact on the realized price. Liquidity is generally quite good for ETFs or Mutual funds in normal market conditions, becomes very significant particularly for corporate bonds during market crises. And the lack of liquidity can be very stressful if you need your money.
Performance. Everybody knows performance, but one thing is looking at the performance of a financial asset or portfolio over a short time horizon, another is looking at performance as an average of different numbers over different time horizons. Much more educational!
Sharpe Ratio. In the AdviseOnly website we have several thousands of investment portfolios, created by our team or by our users. We offer the possibility of sorting investment portfolio not on only by performance, risk or popularity, but also by Sharpe Ratio. Why? Sharpe Ratio is one of the best indicators of the value of an investment over a meaningful time horizon, since it quantifies the investment return per risk unit. You can make a very good return just out of luck while bearing,unknowingly, a disproportionate amount of risk.
While writing this piece I run across a very good post by Efi Pylarinou writing for Daily Fintech, describing the new move for transparency in Portfolio Performance which is happening before the advent of the Mifid II directive.
Transparency does matter, beyond any regulation, since transparency generates trust and command reliability, and without trust you can’t go far in the financial industry.
Making retail investor smarter, through increased transparency and education is key to improve the financial industry as a whole.
Serena Torielli
Founder of AdviseOnly
