The Automation of Asset Management

Algorithms can be used to allocate investor’s money. Just recently, BlackRock has announced to buy FutureAdvisor. It is one of the firms that offers automated financial advisory with distinct advantageous and disadvantageous.

BlackRock, world’s largest asset manager, is going to buy FutureAdvisor. By doing so, BlackRock plans to target mass affluent investors and to reach out to especially younger customers using alternative channels. At FutureAdvisor, as at similar fin-tech start-ups, the age and risk profile of investors is used to create and manage a portfolio automatically. Because this is done without a human component, the so-called robo-advisors are much cheaper than traditional asset managers. BlackRock CEO Larry Fink says, that he expects much more people to use online advisory within the five to ten years.

Instead of a time consuming, human advisory, customers insert information about their financial and personal situation and goals via a website. Based on this information, an algorithm proposes a portfolio and allocates the investor’s money to single funds, if the investor confirms to the proposed portfolio. Most automated advisors distribute among index products and have total costs of 0.5 percent of the invested volume or even less, says Dr. Patrick Kolb, fund manager at the Credit Suisse, in his article “Automatisierte Vermögensmanager: Wo liegen die Herausforderungen im Hinblick auf Sicherheit?”.

Despite regulation helping robo-advisors to enter the market, Dr. Kolb sees four problems for automated asset management. Due to the short track record, customers are unlikely to trust large amounts of money to the unestablished concepts. Second, people are unlikely to trust an algorithm fully; the human component remains important in asset management. Third, questionnaires are only partially helpful because people cannot access their real risk tolerance. Finally, he questions the load capacity of IT systems, especially of the security, with increasing attractiveness of robo-advisors.