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Ruan Jooste’s Rants and Cents: Investing through machines does require some self- learning

Adaptive online platforms, powered by AI, commonly referred to as robo-advice, have steadily increased their market share over the years. Photo:

Adaptive online platforms, powered by AI, commonly referred to as robo-advice, have steadily increased their market share over the years. Photo:

Published May 7, 2023


Generative artificial intelligence (AI) tools like ChatGPT bring powerful capabilities to the man on the street and have the potential to revolutionise everything from the way they walk to the way we talk. But the underlying infrastructure behind disruptive technology in financial planning is nothing new.

Adaptive online platforms, powered by AI, commonly referred to as robo-advice, have steadily increased their market share over the years.

According to a Market Insights Report from Statista, the robo-adviser market in South Africa is experiencing significant growth, with an increasing number of consumers turning to automated investment advice platforms.

One of the key factors driving the demand is the option of lower-cost investment advice, as traditional advisers can be expensive and often require high minimum investment amounts. Another factor is the rise of tech-savvy millennials, who prefer digital platforms for financial services, which can be conveniently accessed at any time, from anywhere with an internet connection and a mobile device.

A recent survey by Sanlam showed clear trends, based on age groups, on the public’s preferences for financial advice. The main resource for financial advice for South Africans aged from 18 to 49 is “online” – although the survey did not disclose whether this could be money-savvy mobile apps, well-known financial institutions websites or investment influencers on YouTube.

The role of physical and human financial advice continues to increase, however, as people get older: 43.7% among those aged 50 to 54; 54.3% among those aged 55 to 59; 55.2% among those aged 60 to 64; and 60% for those who are 65-plus, the Sanlam research shows.

Unfortunately, the older people get, the more likely they are to die. I do not mention this facetiously, but factually. If the trend is for younger people to engage on non-personal platforms, then the financial planning fraternity had better adjust their mindsets and think outside the box, or it will find itself with a shrinking and, ultimately, depleted client base.

Additionally, the Covid-19 pandemic has accelerated the shift to online financial services, including robo-advisers, as more consumers have turned to digital channels for their financial needs.

Statista expects the robo-adviser market to continue to grow in the coming years. Assets under management in this segment are projected to reach $17.65 billion (R321.5bn) in 2023, and the number of users is expected to amount to 2.89 million by 2027. Statista Data shown is using average exchange rates for April and reflects market impacts of the Russia-Ukraine war.

Some of the platforms available in SA include:

  • eToro
  • Moneyfarm
  • Sygnia
  • Personal Capita
  • Wealthsimple
  • Betterment
  • Nutmeg
  • Vanguard
  • Charles Schwab
  • Sanlam

But there are many considerations that need to be made in the search for the best available platform. For example, one needs to explore what assets the robo-adviser will provide exposure to and what fees will be charged. The past performance of the robo-adviser in question, is also of great importance.

The World Bank development research manager Sergio Schmukler says the main feature of robo-advisers is that the process of portfolio investing (from opening an account to monitoring the portfolio) can be performed online with no human interaction.

“Robo-advisers start by conducting an online short questionnaire to assess a client’s investment goals and risk profile. Based on a client’s responses, robo-advisers use automated algorithms to make recommendations on how to allocate funds across different assets. Robo-advisers typically offer low-cost, diversified portfolios by offering to invest in exchange-traded funds (ETFs) and index trackers.

“Besides recommending an initial allocation, algorithms are generally designed to monitor deviations from targeted risks and automatically rebalance the portfolio,” he says.

Automated algorithms can also perform “tax harvesting” more efficiently than human advisers and reduce behavioural biases (such as subjectivity, domestic bias, or limited capacity to follow multiple assets), he adds.

But take note that even when AI is used, some biases might be introduced during its programming, and also, robo-advice does come at an opportunity cost. Assessing clients with a “one-size-fit-all” approach might be too simple to adequately evaluate an individual investor’s specific needs, and robo-advisers also lack certain aspects of holistic client engagement, such as helping in the set of financial goals, counselling during market downturns and the establishment of a trust relationship based on years of experience and expertise.

Automation of the investment process can also lead to consumer disengagement because consumers might not make efforts to understand how the service works or continuously monitor their investments.

Because robo-advisers are relatively new, their business models have not been tested over the long term or under severe financial stress. Think the great depression and the credit crunch.

Because of their low cost and easy accessibility, robo-advisers also have the potential to promote too sophisticated investment practices within a population not equipped to understand the reward or are just looking for solutions in a quick buck. Some recent cryptocurrency scheme scandals are plenty proof of that.

Proper regulation and supervision will be key determinants of the success of robo-advisers in catering for different dynamics and promote financial inclusion and education.

Policymakers would benefit from establishing good practices that guarantee that robo-advisers are objective, and transparent, and provide advice appropriate to each client’s needs.

In my opinion, robo-advice and any comparably new digital financial services solutions remain critically understudied and unregulated.

Despite the Financial Services Conduct Authority having a definition for robo-advice in place for some time now, cryptocurrency enjoyed the same courtesy only since late last year.

Recognition is the first legal step that is required to bring any investment product or platform within the South African legal framework. It also makes it easier for regulators to monitor the market and help to safeguard consumers. But that doesn’t make enforcement encompassing or requires recourse.

While the frameworks for an investment adviser’s legal liability appear flexible enough to incorporate robo-advisers and cryptocurrency, rapid advances in artificial intelligence and machine learning may soon necessitate a rethink of liability regimes applicable to such developing technologies.