Natural selection

The return of the Robo-Advisor

Advisor | December 2020

Every day influential people working in the private banking, asset management and financial consultancy industry remind us about the rise in the total amount of liquidity held by the Italian banking system (which, for the record, is coming close to 1.700 billion euros). Some of them underline that our French and German brothers are no different, in fact they surpass us with 2.000 and 3.000 billion euros in liquid assets respectively. They say that misery loves company…

The Covid-19 pandemic has hastened the rise in the total amount of liquidity – after all, when we fear for our own safety, our sense of vulnerability intensifies; then, wishing to put hay aside for a rainy day, so to speak, is only natural.

It goes without saying that this kind of behavior is far from being rational. Speakers never lose the chance to display diagrams showing how, in the long run, the stock market never disappoints. However, in order to be fully reliable, the analyses and the diagrams should encompass the losses and gains of each client. Today financial networks have become the bastion of asset management thanks to their ability to manage their clients’ emotions and prevent impulsive choices.

It is far less common to come across an in-depth analysis of the reasons behind the Italians’ reluctancy to invest. After all, diagnosing is simple, but finding the causes and working on solutions is much harder. In fact, we rarely hear of “lack of trust,” or “a barely proactive offer,” or “validation of the skills of financial professionals”.

It is no coincidence that today robo-advisors are making a comeback – if financial professionals (human) cannot turn liquid assets into managed assets, the solution may lay in an algorithm (machine).

A CONSOB study (7th Fintech magazine, 21st September 2020) on the behavior of a specific segment of potential clients of robo-advisors reveals that the odds that a client follows investment advice does not depend on whether the advisor is human or digital.

In this regard, it might be worth remembering that behind any algorithm there is its human creator and an organization made of people who promote it. Then, the success of any robo-advisor depends on the credibility of its creators and promoters.

In 2019, Poste Italiane and Money Farm signed one of the largest API (Application Program Interface) integration agreement in the field of European asset management in terms of client base (35 billion), funded on an open innovation system. In this case, the credibility, the reputation and the size of Poste Italiane – joined by Money Farm – made its big scale launch possible.

Let’s imagine a future in which other companies do the same and their innovation is met with greater success. What would become then of barely proactive financial advisors, unable to manage their clients’ emotions? We would certainly witness the sudden massacre of many mediocre financial professionals, as occurred a few years ago in the UK with the implementation of the Retail Distribution Review (RDR).

Therefore, it is fundamental for financial advisors to meet their clients – albeit virtually – as much as or more than before. Mediocre advisors may as well give up: their clients will soon replace them with an algorithm.

Nicola Ronchetti

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