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Behavioral Intelligence

Goodbye Roboadvisors, Hello Roboallocators

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Goodbye Roboadvisors, Hello Roboallocators

Ever since Roboadvisors came into existence, I questioned their true purpose. They marketed themselves as a low cost investment technology platform – which I agree with. But, they have also marketed themselves as a behavioral solution for investors – which I passionately disagree with. I wrote a blog in 2015 detailing my position, and it hasn’t changed since.

Last week, I wrote that some Roboadvisor platforms crashed due to a spike in volatility and investors logging into their accounts…probably to sell. According to InvestmentNews, Roboadvisors are now working on improving their technology platform to ensure the sites don’t crash in the future. But they are overlooking the real issue. The real issue is that their clients were stampeding for the exit. In other words, their technology platform was not helping investors behave more rationally.

Related: The Danger in Relying on Market History

We need to call a spade a spade. Roboadvisors is a misnomer. They should be called Roboallocators, because that is what they do. Robos allocate, rebalance and provide a low cost investment solution. They do absolutely nothing to discourage investors from making emotional, knee jerk reactions as evidenced by last week’s actions.

Can Robos Improve Investor Behavior?
 

Perhaps Robos can do a greater service to investors if they put “curbs” in place as do stock indexes when large moves occur. How about a service that automatically disables the trading feature when the market moves X%? Or at least disabling one side of the trading. If markets are substantially down, perhaps they disable the sell function for a predetermined period of time…maybe a few days. This would actually be a differentiating factor in a highly commoditized offering. Clients would sign up knowing (and wanting) to be locked out at times – for their own good.

Benjamin Graham said the investor is his own worst enemy. We need to create a defense; we need to protect ourselves from making poor (stupid) decisions. A human advisor that understands and is trained in investor behavior may be able to help. Expecting a Roboallocator to help? I don’t think so. Not unless they have provisions in place that will actually stop us from making hasty decisions.

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