Investing,Personal Finance,Shares

Finding the Sweet Spot: Robo Advice and Active Management

20 Oct , 2015  

Schuman Zhang

Schuman Zhang

Business Specialist at Proadviser.com.au
Schuman is an avid reader, writer and curator in personal finance, investment and entrepreneurial communities. He joined the Proadviser team to help grow the professional advisers marketplace and help consumers get the right advice. To get started simply click on “Ask An Adviser”
Schuman Zhang

Access to quality financial advice for the general public has always been a hot topic. In recent years, there seems to be two competing ideologies arising from the investment management space. On the one hand, you have more ‘traditional’ human advisers actively managing investment portfolios. On the other hand, you have a new breed of software platforms that algorithmically create investment portfolios known as ‘robo advisers’. So how do you know which one is right for you?

Better still, is it possible to combine the two or use them both to your advantage?


Case for Robo Advice

I’ve always been a big proponent of robo-advice. It’s a great entry point for anyone who are new to investing. The main selling point of robo-advice is reduced fees. This will undoubtedly fill a significant gap in the market, giving the necessary tools to self-directed investors who don’t have the funds to hire an active portfolio manager or simply don’t have the time to actively manage his/her investments.

Robo-advisers are also very simple in terms of methodology. These software platforms have on-boarding processes that automatically assess your risk tolerance, and allocates your money into a basket of ETFs (exchange traded funds). ETFs are not individual stocks but they simply track the price movement of a basket of stocks in a similar industries. Software algorithms will determine the weighting of each asset class to ensure sufficient diversification. If you invest with a robo-adviser, your portfolio will automatically rebalance every 3 months, and you can simply sit back, relax and go with the ups and downs of the market.

Robo advice not only differs in methodology, but also investment philosophy. It advocates the idea that active management and stocking picking should not be attempted by the ordinary investor. A passive approach to investing is better than trying to look for value, or timing the market. This school of thought is backed up by the fact that even most professional portfolio managers don’t beat the market, so why should you bother? As such true investment performance doesn’t depend on the clever stock selection that you made, but how little you paid in fees. The lower your fees, the more superior your return will be over the long term.


Beating the Market?

But personally, I’d like be better than average. More importantly, I’d like to think of investing as an active and intellectually satisfying pursuit. There are also a few more reasons why active investment is worthwhile.

The market creates opportunities that the alert investor can capitalise on. Volatility in the markets can create the occasional bargain or under-valued stock. An active portfolio manager will have the ability and time to do adequate research and uncover these opportunities as they emerge. After all, investor sentiments often swing from the overly-optimistic to the overly-pessimistic. If you don’t follow the crowd or your emotions, you may be able to uncover some bargain buys.

Pick out great companies that provide lasting value is one of the main tenets of equity research. Active portfolio managers work everyday to discover and determine which companies can unlock value over the long term. The approach of investing for value has been long vindicated by investment legends such as Warren Buffett and Peter Lynch. But to uncover value, one must take a proactive approach. If you’re looking for superior returns, you must also be prepared to be wrong and accept the risks involved in trying to get higher returns.


Combining the Two Approaches?

I make the case that combining the two approaches. Robo-advisers have the potential to make investing accessible to everyone, no matter your experience or how much money you’ve got. It’s a great starting point to own an investment portfolio without the stress. Over time, you can compliment your portfolio with a human touch. Identifying opportunities when the market corrects or finding that ‘great’ company that can provide you big returns. The choice is up to you, remember you can always choose the best of both worlds.


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