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  5. Looking Under the Hood: Robo Advice, Portfolio Risk, and Regulation

Looking Under the Hood: Robo Advice, Portfolio Risk, and Regulation

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13 July 2017
William Trout

The impetus for transparency around investment methodology and portfolio risk management presents an opportunity for robo advisors, as well as for those incumbents who would build or buy them.

Key research questions

  • What explains the regulator’s hands off approach to portfolio risk management?
  • Are the tools used by robo advisors to profile investors sufficient to manage portfolio risk?
  • What factors will drive adoption of portfolio risk management tools?

Abstract

Regulators are just now starting to leaven their enthusiasm for robo advisory solutions with questions around core assumptions. How robust are the underlying algorithms and risk models? Will they be able to handle a black swan event or sustained market downturn?

To date, the transparency enforced upon fees has not been applied to portfolio risk. This opacity has prevented investors from understanding the true costs they are paying for portfolio management services, as well as how these costs are calculated. Robo advisors increasingly will be called upon to apply their core principles of transparency to risk assessment and other operational processes, as well as to share more information on their investment models....

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