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Robo analyst: groundbreaking or gimmick?

David Trainer
David Trainer
Founder and CEO, New Constructs, LLC

The robo analysts are here. Having demonstrated their analytical rigor and objectivity, are they set to overtake robo advisors in the race to transform wealth management?

Today, the wealth management industry finds itself on the brink of a chasm.

In the same way online trading disrupted the distribution of investment advice, big data analytics and machine learning will disrupt how financial advice and the research behind it is created.

The way firms respond to the new technologies transforming how research is performed and investment advice is applied will determine their future success or failure.

Those that try to cling to existing business models will see their trade decline. The winners will transform their businesses and embrace new technologies.

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New Constructs – investment research tools for superior decision making

Active management change

Few firms can afford to let all their assets be siphoned into passive ETFs if they want to create value for their shareholders. The fees and margins in the passive business are far lower than for active management.

The current business model for active management revolves largely around highly-paid fund managers with discretionary authority over large sums of money.

These active managers have, for the most part, significantly underperformed less expensive, passively-managed funds. This trend is a meaningful driver of the shift of assets from active to passive management.

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There are still plenty of investors that want a higher level of personalization and diligence for their portfolio than passive investing can provide.

However, these investors are likely to continue to refrain from investing in active management until they have faith that it can provide better price and performance.

Systematic investing

If the days of the highly-paid fund manager are behind us (with perhaps a few rare exceptions), then what will replace them?

The answer is already manifest in the growth and success of systematic investing, a form of active management that is more science than art.

Systematic investing replaces the intuition and subjectivity behind most traditional active management with analytical rigor and objectivity unmatched by traditional active managers.

But how do systematic investors achieve this?

Meet the robo analyst, a new form of technology focused on leveraging machines to analyze more data and test and produce active investment strategies that out-perform with lower costs.

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Embracing Robo Analyst Technology

Asset managers that have embraced robo analyst technology are winning.

For proof, look at the growth and performance of stand-alone quant firms like Two Sigma and Renaissance.

The systematic managers at more traditional firms like Point72 and Millennium have meaningfully outperformed their old-school discretionary rivals in terms of returns and capital inflows.

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1. Latest closing price provided by exchange. Stock Price Data Source; 2. Values in millions; 4. CSV download does not contain the Price and Market Value columns. New Constructs – investment research tools for superior decision making.

The secret of their success is embracing the automation and data analytics potential of machines to create cost-efficient, rigorous investing processes.

Different mentality

Replicating this success is not necessarily going to be easy for those looking to get into systematic investing. This new form of investing seems to require a different mentality and approach to investing than for the old-school money managers.

To succeed, more firms are going to have to consider new talent to power systematic strategies, or ask existing managers to learn new tricks.

Estimize founder Leigh Drogen compares this shift to Moneyball: just as baseball scouts pushed back against being replaced by algorithms, so too will fund managers.

The few that thrive will be those that learn to harness the power of machines and combine it with human creativity.

Filming The Rise of the Robo Analyst with Darren Duffy (Head of Wealth Mangaement Business Solutions at Thomson Reuters) and David Trainer (CEO, New Constructs)
Filming The Rise of the Robo Analyst with Darren Duffy (Head of Wealth Mangaement Business Solutions) and David Trainer (CEO, New Constructs)

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Proven returns

The marketplace is changing. Investors are not going to pay high fees for under-performance anymore.

They demand low costs and a transparent, rigorous process with proven links to returns. Companies can either invest in the technology to fulfil that demand, or they can be left behind.

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