Technically Speaking
vritti
September 2017
15
How does it work?
The general principle behind Robo – Advisory
is that the markets are efficient and a
diversified and disciplined approach to
investing is necessary for long term growth. diversified according to sound investment
principles based on Market Portfolio Theory,
the Black Litterman Model, the Fama –
French Three-Factor model and so on.
The first step is to understand the
customer’s risk profile through inputs like
age, salary, investment goals, and tolerance
for volatility. This is accomplished with the
help of surveys, questionnaires, and phone
consultations prepared by the experts in
behavioral finance. The customer is charged a small fee for these
services which may vary from .25% to .8% of
AUM. The markets are tracked 24/7, and
when the market shifts, the robo advisor
automatically rebalances the portfolio
according to the risk appetite of the
customer. For example, if the market shifts
and a portfolio that has 70% equity ends up
with more, some portion of the equity is sold
and the proceeds are invested in other asset
classes. This is to ensure that the risk is
according to the customer’s comfort level.
On the basis of this information, the funds
are allocated into a diversified portfolio of
exchange traded funds that reflect an asset
mix that is customized to the customer’s risk
appetite and needs. Portfolio compositions
are overseen by professionals and are broadly