Robo-advisers are likely to grow further. As with all investment management firms, timing is everything, and robo-advisers with long strategies have done well in recent years, given the trend to new highs in equity markets. But, the explicitly long nature of robo-advisers presents a challenge by which they have not yet been tested in the real world: market downturns. Individuals who are sending money to an app through their phones are unlikely to receive the level of financial market and investing education required to make informed decisions. That means they could swiftly become discontented if equity markets tumble, leading to sharper selloffs as unprepared investors on automated platforms make hasty decisions. Those who make “long-term investments” with a robo-adviser with the click of an app may not actually be long-term investors.
This is a similar dynamic to what happened in the housing crisis, when people got into mortgages they may not have fully understood, which exacerbated the collapse in a market already under pressure. The Securities and Exchange Commission said in a Feb. 23 bulletin that investors should thoroughly research automated digital investment advisory programs before using them, In particular, investors should consider how so-called robo-adviser services formulate investment recommendations the level of human interaction involved and the fees charged, the SEC said.John Maynard Keynes is often credited with saying “in the long run, we’re all dead.” But the tech-savvy folks at SXSW know better. Many have laptops with dozens of stickers on them for last year’s tech companies that no longer exist. For some companies in FinTech, the long run may not be that long, and existential downside risks for some robo-advisers could easily be ushered in during an equity market downturn.
Jason Schenker is president and founder at Prestige Economics LLC, a financial market research firm.
This column was provided by Bloomberg News.