As Robo-Advisors Grow in Popularity, Can they Offer Sound Advice on Investments that Tug at the Heart?
New investors are continually entering the market thanks to rational robot advisors, who now manage billions of Danish kroner for thousands of customers. Yet, the combination of data-driven algorithms, investment yield, and sustainable development goals are presenting an increased need for a balancing act.
W ithin 30 minutes, you can sign up for an investment account, gauge your attitude towards risk, and create a broad portfolio, thanks to the help of a trusty robo-advisor. While there is nothing novel about investment advice per se, receiving it through an app and from a robot can be rather off-putting.
Despite this, there are increasing numbers of algorithmic investors setting up accounts and engaging in the market with confidence. This is due, at least in part, to the efforts of the fintech company Nord Investments, Denmark’s second-largest robo-advising firm. With its portfolio of 2000 customers, the company is currently managing half a billion worth of Danish kroner.
According to Anders Hartmann, Nord Investments’ founder and chief executive officer:
We’re on a mission to give everyone access to an easy and intelligent investment solution at a low cost. Our advisory algorithm provides investment proposals that are 100% data-driven and rational in terms of risk and return. There are no subjective attitudes towards shares, industries, or countries
Democratising financial markets
Most solo Danish investors hold two or three stocks, which are primarily Danish. With Nord Investments’ solutions, they could get a broader portfolio and minimise their overall risk. Pointing to the app’s virtues, Hartmann suggests:
“There’s an element of democratisation in it. Yes, we require a minimum deposit, but the way we invest is the way many of those who are wealthy have done for years, because they have been able to afford the correct, neutral advice. We’ve made it available for 30,000 Danish kroner.”
In other words, Nord targets those investors who have come to realise that they cannot beat the market, or who are tired of the high costs associated with traditional wealth management.
Danske Bank has taken democratisation a step further with its investment robot, June. Following a wildly successful launch three years ago, June now manages 1.4 billion DKK for 27,000 customers, who can get started for as little as 100 DKK.
Senior Analyst at Danske Bank, Jacob Hvidberg Falkencrone makes no secret of the fact that the bank is targeting new investors:
Above all, what deters young people from investing is the mistaken assumption that they need a great deal of knowledge and money to get started, and that it’s ultimately risky. So we make it as easy and accessible as possible to get started, to break down their biggest concerns.”
Jacob Hvidberg Falkencrone
June has succeeded in getting both new and younger investors involved. On average, the June-investor is 40 years old compared to 60 years in Danske Bank’s other investing products. And importantly, 60% of June’s clients have not invested elsewhere in Danske Bank. Despite the numbers and trends, Falkencrone still sees greater investment potential, considering, on average, Danish adults have 200,000 DKK sitting in their savings accounts:
“We’re offering a long-term solution, where customers can bring their savings to life and get something more for their money. But there is still a lot of money that’s just waiting to be invested, and this shows us that there are many more people that we have yet to reach through our offers. Granted, it’s a different way of talking about investments, especially for younger people who are not yet wealthy.”
The importance of returns
Robo-advisors have attracted thousands of new investors to the financial markets and are only growing in popularity. At the same time, there’s a greater demand for sustainable investments, and – with that – balancing rational, data-driven robotic consulting with investing from the heart.
Hartmann is quick to point out that Nord’s investment robot doesn’t recommend Tesla or other individual stocks.
“But there is a middle-ground to be found in maintaining low costs, transparency, and neutrality without any hidden agenda,” Hartmann says.
To meet their customers’ demands for sustainable investments, the fintech company has added the option of choosing a ‘responsible’ portfolio. Since this option was made available, the majority of customers have chosen to invest their money here. The same applies to June, which introduced screened funds in 2018; all its customers will be moved to this product in the fall of 2020.
At the same time as the fintechs cater to their customers’ needs, Harmann issues a word of caution:
“Unless you can create high returns by following your heart, you have to be careful about it, and we take the time to explain this to our customers. What’s more, our customers are very satisfied with how we choose portfolios and exclude companies that do not act appropriately in areas like the environment, society, and governance. For many customers, I think that this approach strikes the right balance, and, at the same time, they get a portfolio that is return and risk optimal.”
While he acknowledges the possibility of automating based on themes, the concern with becoming overly targeted is that the robo-advisor could lose its data-driven edge with too few investment choices.