Over the last decade, we’ve seen a major shift towards automation in nearly every industry. Humanless technologies are now an essential part of our lives as we seek speed and convenience at every turn.
This movement has spread to the financial advisory industry, where an automated investment approach known as robo-advice is revolutionising the market. In Australia alone, it’s predicted investments managed by robo-advisors will reach US$5.6 billion in 2021 and grow to $21.2 billion by 2025.
But what exactly are robo-advisors and how did they come about?
What are robo-advisors and how do they work?
Robo-advisors are a type of software designed to do what human investment brokers and wealth managers normally do – except better. They use investment algorithms, or algos, to analyse millions of data points and spread an investor’s money across the most appropriate investments, and make adjustments to maintain an optimal portfolio based on their financial goals.
In other words, robo-advisors are online investment tools that offer automated portfolio management, without the need for human advisors.
As you might expect, robo-advice platforms are significantly cheaper than using a traditional advisor because you don’t have to pay a human to do work for you. They’re also accessible to anyone with an internet connection.
Not only that, but robo-advisors perform better than humans because they’re faster, they never stop and they don’t make decisions based on emotions. One recent study found investment algorithms (used by robo-advisors) significantly outperformed the average novice investor and even experienced investors who fell prey to cognitive biases.
Where did robo-advisors come from?
Back in the day, personalised investment advice was usually reserved for people with a high net worth. Investment advisors were expensive, and minimum deposits were typically much higher than a household investor could afford to part with.
Then the Global Financial Crisis hit in 2008. Major financial institutions like Lehman Brothers filed for bankruptcy, and there was a huge loss of trust in the big guys on Wall Street. This gave a competitive advantage to startups leveraging emerging technologies to provide an alternative to traditional investing.
Automated portfolio allocation software had been around since the early 2000s, but it wasn’t available to the average investor. That was until the first robo-advisor app, Betterment, launched in the US in 2008 and started taking investments in 2010.
Nowadays, robo advice is offered by a variety of apps and online platforms, each with features and algorithms. The best robo-advisors like Unhedged use machine learning to detect patterns in data and maintain an optimal investment portfolio for any investor.
Unhedged: The next generation of robo-advice in Australia
Unhedged is a robo-advisor that uses AI to deliver kick-ass returns to the everyday investor. This is based on two fundamental algorithms:
- The momentum algorithm basically says that stocks that go up for a bit will go up longer, and stocks that go down for a while will continue to do so.
- Every day Unhedged scans 8,000 stocks and selects the best based on fundamental factors.
- We find the companies that profit from their core operations using a proprietary metric that takes the capital structure into account. Once we find them, we wait until Big Money discovers these companies, and we ride the uptrend.
Turtle and the Hare Algorithm (AKA the Robust Hierarchical Risk Parity Algorithm)
This algorithm is based on research by Quant of the Year Marcos Lopez de Prado, who discovered that one should create clusters of stock that behave the same (which are highly correlated).
- Unhedged uses this principle to determine the trend of the market. Are we in an uptrend? If so, we buy ETFs of the sectors of the S&P. Or in a downtrend? In that case, we buy a set of short and long duration bonds (IEF, TLH, TLT).
- Stocks are weighted in such a way that the clusters have an equal contribution to the risk.
Technical mumbo-jumbo aside, we get a kick out of making more money for the everyday investor. Keen to find out how our robo-advisor services work? Join the waiting list now!
Disclaimer: The information in this article is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.