Robo-advisers: Understanding the investment intelligence of A.I.

Robo adviser

Author: Mr Chin20/04/2021

Out of the four major areas, or ABCD of fintech which include artificial intelligence (A.I.), blockchain, cloud computing and big data, A.I. is probably the most hyped-up topic.

I am not an expert on A.I. but I have been keeping an eye on its development. A few years ago, I was amazed at the brilliant performance of the computer programme AlphaGO that defeated a top Korean Go professional. Evolving rapidly, A.I. technology is being integrated into various industries today, such as the financial industry that offers wealth management and investment advice through robo-advisers empowered by A.I. and data analysis.

A.I. does not guarantee high return

Making money is the main goal of investing, and investors care that their financial advisers, be they humans or robots, have the capability of generating the best returns for them. Computers are good at data analysis, capable of processing and analysing a large volume of data quickly, and predicting the probability of a certain scenario. However, we should never assume that A.I. always makes the most accurate analysis or judgment, or is better than professional human advisers.

While A.I. can imitate humans and learn on its own, its “intelligence” is created by humans. When it comes to robo-advisers, the intelligence used in stock selection or portfolio construction usually comes from investment theories and models, such as the Modern Portfolio Theory, as well as some basic investment rules.

  • Diversification – a robo-adviser builds a portfolio mainly with funds and ETFs that often invest in a basket of stocks or other securities to alleviate the risks.

  • Long-term investment – time is a friend when it comes to investing. Many robo-advisers may suggest a buy-and-hold strategy to reduce the impact of short-term market volatilities, and to lower the cost and the risk of making wrong decisions.

  • Minimise the cost – investment cost will erode your returns, so it is always better to keep it low.

Investors may expect to beat the market and generate positive alpha with the help of robo-advisers. However, they should realise that robo-advisers mainly invest in passive index funds and ETFs, which rarely outperform the market or deliver a strong return.

Read more: Should I use a robo-adviser?