Robo-advice not ’biased’ during volatility
Human advice may be outperformed by robo-advice during times of market volatility, considering automated tools are not subject to behavioural bias, says BetaSmartz.
BetaSmartz chief executive John James said eliminating behavioural bias means that robo-advisers will accurately manage risk, and “will always have an advantage over humans”.
Mr James argued that robos are not subject to a domestic or “home bias” to the extent that human advisers are.
“This [domestic] bias can limit diversification and, in a volatile environment, completely exposing an investor to just one market may not be the optimal way to meet their goal,” he said.
He explained that robo-advisers can easily navigate volatility because they have constructed globally-diversified and risk-adjusted portfolios. The algorithms used to construct portfolios also consider factors such as cost, liquidity, turnover and tax efficiency.
According to Mr James, robo-advice paltforms often use low-cost and liquid exchange-traded funds (ETFs) to generate alpha. Some also use active management to add more alpha over time.
“Robo-advice can further manage risk by automatically rebalancing portfolios on a daily basis and ensuring investors maintain an allocation within their risk profile,” he said.
