Wednesday, March 15, 2017

Untested Robo-Advisers Are Becoming a Big Market Risk

Bloomberg reports:
FinTech is now considered trendy enough to be part of the 2017 South by Southwest Festival in Austin, Texas -- one of the most important technology and culture conferences in the U.S. -- along with Kesha, "Game of Thrones" and Mark Cuban.

The realm of financial technology is a hodgepodge of businesses touching finance, investing, and capital movements that is lumped into a trendy but amorphous hypernym. But, behind the trendy term and some big opportunities are major risks that threaten individual investors in a way that could exacerbate financial market moves.

The biggest FinTech threat to traditional finance on Wall Street -- as well as to markets -- comes from robo-advising, which is a highly automated form of passive asset management. (It was also at the crux of the FinTech SXSW panel discussion that I was part of on March 11.) There are some 2,148 robo-advisers with $140 billion in assets, up from just 51 with $2 billion in 2013, according to Aite Group. Assets are estimated to double to $285 billion by the end of 2017.

Traditional active asset managers on Wall Street have been facing the downside risks of passive management for some time, and the expansion of robo-advising has increased the risks as broader swathes of the population become more accustomed to app-based relationships with financial markets. In a 2016 survey by the CFA Society, asset management was the financial services sector that was the most affected by financial advice tools. But alpha, or how much a manager adds to returns beyond what's generated by a benchmark, is tough to capture, and the robos are untested in a downturn. As such, active asset management is anything but dead.
Stay tuned..