There are many investors and analysts that are calling 2016 the year of the robo. One can barely get on a computer without being bombarded with ads and content from a sector that is growing faster than it can handle.
Even some of the more traditional brokers are starting to offer a more digitalized version of an advisor for a new generation of investors that expect massive amounts of data to be at their fingertips, sorted and organized for their viewing pleasure. The market for these robo advisors is expected to move from $2 billion in 2013 to $500 billion in 2020.
Investing has never been an easy game. There are thousands of variables playing into financial markets at any given time, making it virtually impossible for man and machine alike to consistently and accurately call market movements. That is exactly what robo advisors intend to do, however. In theory, if one had all the necessary data, they should be able to accurately predict market movements virtually every single time. This concept has brought about a massive push for data in wealth management.
How they work
Robo advisors take a persons data, crunch it, and find smart investment decisions based on that data. Some are able to look at thousands of variables at once including demographics, timing, historical trends, technical analysis, fundamental analysis, market sentiment, and much more. No human would ever be able to sort so much information and make the best decisions possible, but robo advisors do it every day. Then they continue to rebalance investors portfolios as time goes on.
One of the boring data-driven tasks they take on is that of tax optimization. Capital gains taxes can be a confusing world. If an investor has purchased and sold hundreds of securities in a given year, then there is a good chance they dont have the time to dig through portfolios and try to make loss decisions to offset profits for tax season. Not only is it incredibly boring, it is also incredibly time consuming. Robo advisors have the ability to crunch the numbers and all of the possibilities and outcomes and make the best decision for your portfolio down to the penny.
What data they have
Robo advisors will succeed or fail based on their ability to continue to harvest and reliably understand large amounts of data. Currently they are already using a large amount of conventional market data that is available such as volume, volatility, expense ratios, beta and other measures of performance, past stock performance, and more. They also are given basic numbers such as earnings, sales, and growth trends.
This is just the beginning of the data being fed into the average robo advisor, however. They are also given what is called non-financial data. This can go any number of different directions. They could be looped in on the number of website visitors an online company is getting or given the social signals. These are used to determine how people generally feel about the company. Some can pull Twitter data and even the traffic in their parking lots!
One interesting one is Motif Investing which allows user to simply select one single trend that they think will occur in the next few years, then Motifs platform crunches the data and helps build a portfolio based around what that trend would do to the markets.
Future
Realistically the sky is the limit when it comes to big data and robo advisors. Virtually everything in politics, economics, fashion, social media, and other aspects of most peoples lives will affect world finance markets in one way, shape, or form. Robo advisors have the task of finding ways to get access to such data, and then finding ways to tie it into price movements and growth trends. As they get better at doing so, and the millennial generation becomes the generation worried about retirement, we can expect vast amounts of money to be moved via these robo advisors.
