BetaSmartz chief executive John James said eliminating behavioural bias means that robo-advisers will accurately manage risk, and “will always have an advantage over humans”.
Mr James argued that robos are not subject to a domestic or “home bias” to the extent that human advisers are.
“This [domestic] bias can limit diversification and, in a volatile environment, completely exposing an investor to just one market may not be the optimal way to meet their goal,” he said.
He explained that robo-advisers can easily navigate volatility because they have constructed globally-diversified and risk-adjusted portfolios. The algorithms used to construct portfolios also consider factors such as cost, liquidity, turnover and tax efficiency.
According to Mr James, robo-advice paltforms often use low-cost and liquid exchange-traded funds (ETFs) to generate alpha. Some also use active management to add more alpha over time.
“Robo-advice can further manage risk by automatically rebalancing portfolios on a daily basis and ensuring investors maintain an allocation within their risk profile,” he said.
When it comes to tax efficiency, robos engage in a daily tax harvesting process.
“By searching the portfolios for harvesting opportunities daily, the investor has the opportunity to gain additional tax alpha by writing down losses more frequently, at the same time reinvesting in highly correlated assets to maintain the allocations they have chosen,” Mr James said.
He added that the automated nature of robo-advice helps reduce overall fund management and transaction costs.
“In a bearish market, where lower returns may have investors focused on cost and risk/return, this is more critical than ever,” he said.
