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How technology is democratising the way we invest

Nadine Mezher/Dubai
Filed on January 1, 2020
How technology is democratising the way we invest

(KT file)

Today, in our daily lives, we have been gradually paying less and getting more. It applies to all aspects of our daily trades, so why should investing be any different?

Modern clients are used to companies such as Amazon and Uber providing them with both convenience and affordability; modern investors are also demanding more. With technology evolving exponentially, artificial learning is changing various industries landscape at a rapid path. One industry is particularly feeling this 'disruption' more than others: The world of financial planning.

The recent years saw the rise of robo-advisors, a class of financial advisors that provide financial advice or investment management online with moderate to minimal human intervention. By using algorithms to analyse a client's profile and delivering solutions tailored to one's needs and risk appetite, robo-advisors made investing simple and affordable.

But most importantly, combining proven investment strategies with technology ultimately drives down costs which helps clients invest better and ultimately retire better. After decades of being perceived as catering to a small group of affluent clients, the industry is starting to change. Thankfully. This new breed of financial advisors is doing for wealth management what Amazon did for commerce and is on a mission to democratise investing. Wealth management was simply out of reach for most people. Robo-advisors are gaining more ground on traditional advisors and here is why.

I recently sat down with friends at a dinner table and we were discussing the usual topics: Work/life balance and how we all want to retire early on that Greek island where everyone found the key to a long happy life. And then the 'investing' subject popped up.

A friend of mine works as a financial advisor in a traditional wealth management firm. This obviously led to our favourite subject that divided our little dinner group into two: active versus passive investors. Clearly, I am part of the second batch. My friend remained unscathed and reached deep into his own repertoire of research findings to come up with arguments why his industry is going nowhere.

I had to agree: His industry is not going anywhere, it is simply transforming, reshaping into its better version. Numbers do not lie.

Back in 2007, Warren Buffett - the world's most successful investor - made a bet with a friend. This was no ordinary wager: Buffett bet Protégé Partners, an asset manager, $1 million that a passively managed index fund would outperform a collection of hedge funds over the course of the next decade. Buffett won the bet. Over 10 years, the S&P 500 index fund returned 7.1 per cent, with the basket of funds selected by Protégé Partners returning 2.2 per cent. Buffett attributed this disparity to passive investing and to the fees that active managers charge. He observed: "Performance comes, performance goes. Fees never falter."

Historically, a client would not even be aware of the blend of different fees that are hidden somewhere in the many documents signed. These can vary from account opening, advisory fee, trading/transaction fees, account closing fees, to name a few. Today, transparency is key: Investors want to know how much they are paying and for what.

The Warren Buffet bet is just one famous example of how passive outperforms active management and how cutting down on fees has an exponential impact on returns. Evidence is emerging all the time. S&P Dow Jones Indices recently released its annual report on how actively managed funds performed against their benchmarks. The conclusion? Passive is still showing higher performance even during volatility of markets.

By the end of 2018, Some $4.6 trillion was held in Exchange Traded Funds assets globally with Passive funds making up 45 per cent of AUM in equity funds and 26 per cent for bond funds. The numbers are on the rise.

Thanks to the limitations of the traditional wealth management approach, a significant gap has emerged. And into that gap has stepped a new breed of advisors offering high-quality, low-cost financial advice - Robo-advisors is the most common name used today. The power of automation is opening wealth management up to a much broader audience.

There is still a case to be made on active investing for those who have a larger appetite for risk, and still want to have control over their choices of direct investments. Some might even argue that a good percentage of investable assets is held by an older generation that prefers to deal with humans and is not necessarily catered to by robo-advisory. According to a recent Deloitte report, the winning strategy for these investors is to use a hybrid robo-advisor model - 'one that combines a superior digital experience with qualified, human-led advisory services'.

To my friend at this dinner table, I say: wealth advisory is going through a transformational phase. With the rise of robo-advisors, it is becoming more transparent, more affordable and more accessible for all.

- Nadine Mezher is co-founder and CMO of Sarwa. Views expressed are her own and do not reflect the newspaper's policy.


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