Status: 02/27/2023 08:19 a.m
Robo advisors automatically invest money. Financial experts warn against expectations of excessive returns: companies are often unable to offer tailor-made asset management.
The members of the “Frankfurt Finance Club” are certain: Robo-Advisors are a sensible way of investing. The club is a kind of student stock market regulars’ table at the local technical college, which regularly organizes lectures and workshops. Some students have already had experience with robo advisors themselves.
“I think the inhibition threshold is just really lowered to deal with the topic,” says Simon Pausewang, for example. “I actually think it’s very good, especially if you don’t have any prior knowledge of the capital market,” adds his fellow student Jeremias Fricke. The fact that a machine controls the investment without feelings doesn’t bother Moritz Kaltenbrunner at all: “Of course, that can also be exactly the advantage over people who traditionally manage investment products.”
Algorithms control the investment
The functional principle of the so-called robo-advisors – a term made up of the English words robot (robot) and advisor (adviser) – is quite simple from the investor’s point of view: he must first use an app or a PC to answer a few basic questions about age, Answer savings and investment behavior. The questionnaires usually only take a few minutes.
The provider then creates a personal risk profile and an investment strategy, opens a custody account for the private investor at a partner bank – and investing can begin. Both one-time payments and monthly savings installments are possible, for example from 25 or 50 euros.
Little effort, little cost
Most robo-advisors invest their clients’ money in low-cost ETFs (exchange-traded funds). Depending on the development of the securities, the programmed algorithms automatically reallocate the portfolio, this process is called “rebalancing” in the industry. Within a month, there can be a number of automatic purchases and sales of ETF funds or other securities.
The providers advertise to potential customers with low costs, usually less than one percent of the total amount invested. The goal is clear: Get the best possible result on the capital market for the investor, with little risk. “But we don’t promise anyone an excess return,” says Olaf Zeitnitz, co-founder of VisualVest, the robo-advisor of the fund company Union Investment. “It’s a simple, solid system. Robo advisors generate standard returns.” By combining various widely diversified investments, mostly ETFs, the aim is to perform better than the individual investments.
The niche is growing vigorously
The advertising promises of robo-advisors have apparently fallen on fertile ground in recent years: the assets they manage in Germany are growing significantly. According to data from “Statista Digital Market Insights”, it was 1.8 billion euros in Germany in 2018, but in 2021 the value has risen to almost 15.3 billion euros. According to the forecast, the 30 billion euro mark could be reached next year.
However, you have to keep an eye on the ratios: According to the BVI fund association, the total assets managed by the German investment industry in open-ended mutual funds last year was 1,280 billion euros. The proportion of robo advisors is therefore less than two percent.
Not a lucrative business
The business model of robo-advisors does not seem to be a money printing machine at the moment. “It’s very difficult to earn money in this environment, you have to admit,” says Olaf Zeitnitz. Many providers have problems because they have to invest a lot in marketing and in acquiring new customers.
His company with around 100 employees made a profit of around one million euros in the 2021 financial year. But the majority of the income comes from the parent company Union Investment – for products that VisualVest offers to other banks, the classic B2B business. According to Zeitnitz, his company could not live from the private customer business alone, i.e. the actual robo-advisor.
General instead of individual investments
For customers, in turn, the question arises as to what the financial robots can actually do. Andreas Oehler, finance scientist at the University of Bamberg, does not want to leave the possible disadvantages unmentioned. For him, that starts with the list of questions asked by the providers.
Important details for comprehensive advice are not asked: whether the investor is married, has a family or not, whether there is a company pension or property ownership, or whether a loan has to be paid off. “If I’m in debt, very few robots will point out that the debt should perhaps be repaid first, if possible,” says Oehler.
Financial knowledge required
Oehler also only partially accepts the advertising message of some providers that you don’t need any financial knowledge to invest your money via robo-advisors. In his opinion, well-informed investors must be assumed, otherwise they would not be able to decide which provider is the right one, which ETFs in the portfolio are the right ones. “If I want to find a suitable robo, I need at least as much time as if I were making the investment myself in a simple way. The time required for a robo-advisor is more,” says Oehler.
According to his scientific studies, the frequent automatic reallocation of the portfolio can also have a negative impact on returns – because of the transaction costs. Those who invest their money widely in ETFs sometimes fare better. In any case, past crises on the financial markets would not have revealed any yield advantage for robo-advisors. “A lot of robos didn’t cope well with it, but instead achieved less return with the same risk than if you had done it yourself,” says the financial expert.