Robo-advisors becoming popular despite lingering skepticism

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Robo-advisors becoming popular despite lingering skepticism

 
A model uses robo-advisor app Fint [DECEMBER & COMPANY]

A model uses robo-advisor app Fint [DECEMBER & COMPANY]

 
Robo-advisors, long shunned by skeptical investors, started to attract customers in a serious way in 2020.  
 
The services use algorithms to make investment recommendations or actually trade for the customers, who input their interests and risk appetites for the programs to process. Assets available include everything from U.S. equities to gold.  
 
Human supervision is minimal.  
 
Handing over a portfolio to a machine, or even taking advice from a computer, was not something the public readily accepted until recently. Few wanted a robot handling their financial affairs.  
 
As of June 2021, 379,477 people used robo-advisors, according to Robo Advisor Test Bed Center, an organization under Koscom, a state-run financial IT solution company.
 
That's up 81.7 percent on year.
 
Assets under management totaled 1.76 trillion won, up 46.9 percent, during the same period.  
 
Big name robo-advisor apps in Korea include Fount, Quantec, Boolileo and Fint, and some are reporting strong returns.
 
Fount claims an 11.2 percent rate of return in 2021. Last year, the Kospi rose 3.63 percent.
 
The company takes 15 percent of the gain as a fee.
 
"The goal of a robo-advisor is to offer annual seven to eight percent stable returns to anyone through global asset diversification," said Fount CEO Kim Young-bin. "The target return can be achieved when invested for at least six months or a year rather than three months or less."
 
Fint, which manages around 100 billion won in total assets, reported a 20.7 percent rate of return for aggressive investors when they invested in foreign stocks in 2021, according to a report in December. It charges its customers 9.5 percent of the gains.  
 
In 2021, the Nasdaq Composite rose 21.4 percent and the S&P 500 rose 26.9 percent.  
 
 
But some say rate of return is not the most crucial factor when it comes to robo-advisors.  
 
"Since robo-advisors were first introduced in Korea in September 2016, robo-advisors have often been solely evaluated and were criticized based on rates of return," said Lee Sung-bok, a financial services industry research fellow at the Korea Capital Market Institute. "But evaluating robo-advisors based on rate of return is not considering their fundamental role, which is to efficiently manage financial assets over the long term based on investor tendency."
 
An efficient asset manager timely readjusts a portfolio depending on the market situations and ultimately increases returns while lowering risk, according to Lee.  
 
The primary target is young people who are able to wait for returns over the long term.  
 
"Our service is for people in their 20s and 30s who are able to invest through their retirement," said Kang Su-jin, a spokesperson for December & Company, which runs Fint. "Though the amount of assets they have is relatively small, their purchasing power will grow as they age. So the fact that they experience the service and consider it as a new way to invest is important to us."
 
Robo-advisors face a number of challenges, not the least of which is the technology itself, which the companies market as "AI."
 
"Since AI still isn't able to perfectly create its own knowledge, the portfolios it offers are quite standardized," said Won Chae-hwan, a finance professor at Sogang Business School. "It can't take into consideration personal factors when creating or adjusting a portfolio."
 
Robo-advisor apps build a portfolio based on multiple factors, including age, annual income and risk appetite. Some users complain that the decision-making process is not all that clear.
 
"I started questioning how the robo-advisor works after finding out that my portfolio as a conservative investor and that of my friend, an aggressive investor, turned out to be similar on the same platform," said a commenter on YouTube last year.  
 
Fount said the stock and bond ratio differs depending on an investor's aggressiveness. For conservative investors, the robo-advisor invests 20 percent in stocks and 80 percent in bonds. For aggressive investors, it invests 80 percent in stocks and 20 percent in bonds.  
 
 
Regulations are limiting the growth of robo-advisor market.  
 
"Currently, robo-advisor companies are not on the list of organizations that are allowed to manage retirement pensions," said Kang from December & Company. "If the market opens in line with the development of the AI technology, I believe a lot of lives after their retirement will improve and also the robo-advisor market will grow."
 
Korea's retirement pension assets totaled 285.4 trillion won last year.
 
Robo-advisors are currently able to manage personal pensions, like pension-fund savings.
 
"The rate of return for a lot of retirement pensions stands around one percent. Considering inflation, people are losing money," said an industry insider who asked for anonymity.  
 
The annual rate of return for pensions managed by banks was 1 percent-range last year. KB Kookmin Bank reported 1.25 percent rate of return for retirement pensions last year, while Shinhan Bank reported 1.21 percent return, according to Korea Federation of Banks. 
 
Robo-advisor apps are striving to improve their services to address doubts and suspicions.
 
Boolileo, a robo-advisor app made available in 2019, said the future of the robo-advisor service will be about providing more personalized portfolio management services and harvesting the data of clients.  
 
"Customers could already access a portfolio recommendation service at brokerages before robo-advisors appeared," said Dave Lee, chief commercial officer at Doomoolmori, which runs Boolileo. "The first generation robo-advisor was about bringing the experience online. The second generation will be focused more on goal-based investment."
 
Under goal-based investing, a target rate of return is the start. The portfolio will be adjusted to reach the profit goal.
 
Creating a personalized index that consists of a list of stocks that are projected to jump is another robo-advisor service Boolileo plans to market soon.  
 
"The second-generational robo-advisor will be about offering more personalized asset management, just like it is being exclusively managed by a personal fund manager," Lee added.  
 
Fint aims to become a "lifestyle finance advisor."
 
"We recently obtained a MyData license," said Kang from December & Company.  
 
MyData is a government-led project that allows licensed service providers to collect and analyze personal data scattered across accounts and different institution.  
 
"By accessing the financial information of our users, like their investments, loans and deposits, Fint will be able to suggest lifestyle finance services, like when and where they should make leveraged investments," said Kang.  
 
"Robo-advisors will become much more prevalent in the future once the portfolio models grow more precise and sophisticated," said Prof. Won. "Growth of the robo-advisor market will be inevitable as the number of bankers, including private bankers, will be reduced as financial organizations try to cut labor costs."  
 
 
 

BY JIN MIN-JI [jin.minji@joongang.co.kr]
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