Home >Opinion >Can robo-advisors help in a volatile stock market?

Mumbai: Even as traditional brokerages and financial advisors continue to proffer advice in today’s fast-paced high-frequency trading environment, many investors have begun toying with alternative means of information such as Google Trends, Wikipedia, Twitter and even turning to so-called robo-advisors to make sense of movements in extensively algorithm-driven stock markets.

Defined as providers of automated, low-cost, investment advisory services through web-based and, or, mobile platforms, robo-advisors managed $19 billion worth of total assets of the 11 robo-advisory firms that were surveyed by consulting firm Corporate Insight Inc. as on December 2014.

The figures may only rise. Robo-advisory services, which have been in existence for about six years, will become mainstream over the next 3-5 years, and about $2 trillion will be managed under robo-advisors by 2020, according to an 18 June report by consulting firm A.T. Kearney which believes that robo-advisory is the next step in the evolution of asset management and financial advice.

The document is based on the A.T. Kearney 2015 Robo-Advisory Services Study that surveyed over 4,000 US consumers at least 18 years of age who are “banked".

Once you enroll for the service, you enter your risk profile and, using advanced algorithms, the platform offers alternative personalized investment portfolios for you to choose from and continues to rebalance your portfolio as required. This is all done digitally without you having to talk to a live person.

Robo-advisory services are even offered by renowned firms like Charles Schwab that launched a fully-automated investment advisory service called Schwab Intelligent Portfolios—an investment advisory service that uses computer algorithms to build, monitor, and rebalance diversified portfolios based on an investor’s goals, time horizon and risk tolerance—on 9 March.

Charles Schwab’s robo-advisory does not charge any advisory fees, commissions or account services fees. Other popular names include US and UK-based robo-advisory firms like Wealthfront, Nutmeg, Betterment, Personal Capital and FutureAdvisor.

India has its own robo-advisory start-up called ArthaYantra which claims that “69,000 families across over 500 locations are using our online platform to achieve their financial goals". Established in 2008, ArthaYantra uses a patented methodology called the Personal Financial Lifecycle Management on its online platform, Arthos.

Pricing—low cost and transparent—is the critical element of any robo-advisory offering, the A.T. Kearney report said. It added that to accelerate adoption, providers need to invest in increasing awareness of robo-advisory services and develop a track record to probe the strength of the business model to more careful, risk adverse investors.

Investors, meanwhile, are also relying on other investor tools like StockTwits—a financial communications platform for the financial and investing community. Founded in 2008 by Howard Lindzon, StockTwits created the $TICKER tag.

Anyone can browse its streams consisting of ideas, links, charts and other important financial data, summarized within 140 character messages. Users, which include analysts, media and investors of all types, as well as the public companies themselves, contribute to the stream.

Today, more than 300,000 investors, market professionals and public companies share information and ideas about the market and individual stocks using StockTwits, producing streams that are viewed by an audience of over 40 million across the financial web and social media platforms, according to the company’s website.

Researchers, on their part, periodically undertake studies to analyse whether tools like Google Trends, Wikipedia and Twitter really help in predicting stock market movements or not.

Changes in Google query volume for search terms related to finance, for instance, reveals patterns that could be interpreted as early-warning signs of stock market moves, according to a study titled ‘Quantifying Trading Behaviour in Financial Markets Using Google Trends’. It was co-authored by Helen Susannah Moat and H. Eugene Stanley and was published in Scientific Reports on 25 April, 2013.

A month later, the same authors published another study in Scientific Reports, demonstrating that changes in how often financially-related pages were viewed on Wikipedia could have been linked to subsequent movements of the Dow Jones Industrial Average.

But that very year, researchers Chris Loughlin and Erik Harnisch published another study titled ‘The Viability of StockTwits and Google Trends to Predict the Stock Market’, in which they said, “From our analysis, Google Trends data was not significant in predicting stock returns. But StockTwits data was significant in predicting Apple, Google, and Microsoft stock returns... Because we only covered four companies, this isn’t a foolproof investment tool. It was merely an investigation and exploration into using alternative information sources."

In sum, while technology is undoubtedly providing more analytical tools to decipher stock movements that are increasingly being dictated by algorithms, investors will still have to rely on the age-old adage: Caveat emptor.

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