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Tuesday, September 22, 2020

When Black Swans Meet Robo-Advisors

According to the recent 2014 Scottrade Advisor Survey, financial advisors are well aware of the robo-threat to their business. However, when asked about the potential problems with online portfolio management platforms, virtually all RIAs focus on the lack of human interaction as the main weakness: 80% of advisors say robos’ biggest weakness is “Lack of Human Interaction” and 46% say that “Lack of Service” which can be considered the same human interaction element.

However, there is one major robo’s weakness that is not revealed in that study. Robo-advisors were all founded in 2009 or later and they have never seen a meaningful downturn in the financial markets. Yet, their algorithms are based on the mean-variance methodologies that were in place on risk platforms prior to the last downturn in 2008. These methodologies are highly susceptible to the market shocks.

A thorough overview of the nature of this weakness and how it may be dangerous is provided in RiXtrema’s article “When Black Swans Meet Robos” published in Financial Planning magazine. Read the full article here:

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