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Because the future is Hybrid

February 24, 2018

Everyone that invested in the traditional financial market can evidenced how the costs of distributing financial products are disproportionate, especially today that the expected returns on the various asset classes are really very low.

Over the years there have been a series of new business models trying to reduce this exaggerated cost.

 

ETFS INSTEAD OF FUNDS

ETFs, with their quantitative and passive replication of the financial markets, represent an excellent choice for those who want to save on operating costs; in fact the commissions of these products are very low in comparison with the funds and even more in the comparison of Hedge funds.

But buying ETFs is not enough, you have to know how to make investment portfolios for the specific needs of the investor, otherwise you are likely to passively follow the market and when this should reverse the protection against losses would be nothing.

Thus the so-called Robo Advisors are born, that is, fully digitized platforms that offer standardized investment solutions that can suit some people.

 

If we wanted to simplify the concept, the Robo Advisor offers specific sizes of clothing, covering a part of the population that have common physical characteristics, and therefore it is assumed that if you have a body that fits into its clusters (groups Homogeneous) then you can wear that particular garment.

 

So are the Robo advisors the future of investment?

Maybe or maybe not.

 

The Robo advisors have several limitations that I have highlighted in a presentation at the Global derivatives Conference (for those who want to watch the slides you can view on the SlideShare of Linkedin), but that were actually highlighted by characters much more Illustrious of me in the United States.

 

LIMIT

One of the most obvious limits is that being based on Web pages without any contact with human beings (often chats are managed by the so-called "Chatbot", or automatic chats) or very limited, Robo advisors will suffer big ransoms when there will be a financial market crisis, as no one will be available to manage the customer's emotions.

 

DANGEROUS ASSUMPTION

Those who invest through the Robo advisor expect that these management models chosen by the machine will be able to reduce losses in the event of market crises; This conviction is very wrong because almost all Robo advisors use really obsolete quantitative models and they are not absolutely able to reduce portfolio losses in the event of market crises.

 

NO INNOVATION

The models are often based on the efficient frontier of Markowitz, of which I spoke extensively in the posts... that at the theoretical level are very valid, but in practice have proven not to work as asset allocation portfolio.

 

NOBEL PRICE

Markowitz, as I have said it several times was a genius, rightly rewarded with the Nobel Prize, but his intuition goes back to 1954, and rely on models made in the post-war, when there were no computers to understand, just because it can be said that Nobel Prize winning models are used, it is an excellent marketing idea, but a bad one for the long-term results of its customers.

 

Analyzing the companies of Robo Advisors that are more successful, Vanguard stands out on all, with over 107 billion (the data are old and referred to the presentation I had held last year); However, analyzing on the site of the SEC (the American Commission corresponding to our CONSOB) it turns out that Vanguard has the beauty of 650 financial advisors that manage their relationship with customers, mainly via video calls always on the computer, but at least there is a person on, who is able to manage customers' short-term emotions.

 

The recent news that even Bettlement, perhaps the start-up (i.e. not resulting from an existing brand) of Robo Advisors more successful in the United States, is assuming financial planner and has confirmed that the hybrid model, man and machine, or rather man and digital is the best formula to maximize the chances of long-term survival of the business model.

 

Of course, having to pay a consultant, to manage their emotions and not to make behavioural errors that damage their investment, is an additional cost compared to the pure Robo advisors, which in the long run can have its weight in terms of absolute results, but may be liable to errors on the fault of one's emotions and probably has a greater impact, as often said by a dear friend, prof. Bertelli: "The performance of our investments does not make by the markets but by our behaviors".

 

So if I were to make a prediction about which business model will be established in the next few years, choosing between the obsolete model of financial networks that have substantial superstructure costs and the model of Robo advisors, I will definitely choose the hybrid model, i.e, where the digitization of processes, with quantitative or non-quantitative management, supports the financial advisors, aka financial consultants to make the most of their work at a cost more reasonable than that currently offered by intermediaries that have a network at different levels only for the sale of their products.

 

Technology at the service of man, not in the place of man.

 

If you want to know something more about the project and the platform #PHI that we are realizing in this sense I invite you to visit the site www.phitoken.io

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