Critics say automated services don’t have enough data to be reliable

While all eyes are on new automated investment services, or so-called robo-advisers, some experts in the financial industry are questioning their reliability and urging investors to not use the systems until they have accumulated more data.

Big data analysis and artificial intelligence (AI) are key pillars of robo-advisers services, meaning that the more data the algorithms accumulate, the more versatile they will become in reacting to unstable market conditions.

The services begin by asking customers to answer five or six questions about their assets, age, risk inclinations and investment goals.

Korean robo-adviserss can also analyze market data in and outside the country in real time. At the end of each day, human asset managers input key information from that data, and then the algorithm adjusts the asset allocation of each client’s portfolio based on the person’s preferences and goals.

But many financial analysts are still maintaining a conservative stance, arguing it’s too early to trust the services.

One possible reason for the hesitance is fear that the services could lead to human fund managers losing their jobs, but industry insiders argue that human managers will continue to exist until robo advisors prove stable.

“It’s too early to conclude that robo-adviserss perform so well that they can replace human fund managers,” said Oh In-dae, head of the future finance department at Mirae Asset Daewoo. “To be honest, we still can’t trust them fully because the system is only a few months old and has never experienced collapsing market situations like a financial crisis.”

Oh did not disclose specific returns, saying that investors should not sign up with robo-adviserss expecting to immediately make money. The brokerage plans to keep an eye on returns and make an announcement in June.

“We decided to offer robo-advisers services just to give a wider range of products like global exchange-traded funds, which human managers can’t cover because of the sheer volume of data involved,” Oh said. “We aim to use the robo-advisers alongside human-managed funds so that algorithms can do what they do best while humans also play to their strengths.”

Kwon Woo-young, a researcher at Woori Finance Research Institute, said that investors should approach robo advisors conservatively because the home-grown algorithms are still not fully managed by AI.

“Currently, robo advisors are simply based on algorithms rather than an AI system that learns on its own, so fundamental investment direction is determined by humans, which doesn’t make them much different from how human fund managers already do things,” Kwon said. “Problematically, most Korean robo-advisers start-ups come from IT specialists and lack reliable asset managers.”

It is also too early to known whether or not robo-advisers can offer better returns than their human counterparts.

“So far, the global capital market has stayed steady with not too many drastic ups or downs. That must be why the robo advisors’ returns may have seemed both stable and quite high,” Kwon added. “The algorithms can’t replace human managers, as human managers seem to be stronger in yielding higher returns while the algorithms are designed to focus on making low but stable returns.”

It’s also risky to invest with robo advisors because there is no legal system in Korea to protect investors’ assets in the event the algorithms make a mistake, the Korea Institute of Finance warned.

BY KIM JI-YOON [kim.jiyoon@joongang.co.kr]