What Is a Robo-Advisor?

Finax Is a Robo-Advisor 

Robo advisor is still a relatively new term. They first emerged in the USA in 2008 and have revolutionized how people invest, providing automated solutions that simplify portfolio management.

Their purpose is to help small investors and financial agents choose the best investment portfolio and to guide them through the process. Most robo-advisors recommend to invest passively with elements of automatic portfolio adjustments – rebalansing.

Since labor tends to be the most expensive part of any service, replacing people with automatic process managed to significantly cut the price of investment services, thus boosting the clients’ profits.

Let’s be honest, algorithm is not influenced by emotions, it is fully objective and fair – it doesn’t care if you have 20 or a million euros in your bank account.

Finax was the first ever robo-advisor in Central Europe. However, we didn’t stop there, and we went substantially further compared to our competitors. We’re one of the few that also offer their services through external advisors – financial agents.  

For most clients, the largest issue at the beginning of their investment journey is not being oriented in their own money. Usually the best way to tackle the issue is personal contact with their financial advisor. At the same time, the advisor provides long-term care, without changing their rates.

Using online space to the fullest and automatization of our process allows us to offer our services cheaper compared to the competition. In order to even further alleviate pressure from our employees and thus lower the cost for you, we’ve prepared a detailed FAQ on our page.

However, if you still have any questions, you are free to call us or send us an email at any time. You may further meet us face to face during Finax Mondays or alternatively, you may ask your questions during our live webinars. 

What About the Algorithm? How Does It Work? 

The first,  and the most crucial assumption for your set up to work correctly, is to truthfully answer the questions we ask you when creating an investment plan. Provided answers influence the risk level, and that’s why your answers should reflect your current situation and plans accurately.

The Questionnaire Is Our Only Source of Information About You, and It Is a Foundation for Setting Up an Investment That May Last Decades. 

The investment might become too risky due to untruthful answers, and in the event of a larger market drop, you may not be able to bear the temporary loss, and you will end it prematurely.

And terminating the investment prematurely is one of the greatest mistakes you can make. The key assumption for any successful investment is keeping the investment horizon. The portfolio choice is adjusted accordingly when setting up the investment.  

Or quite the opposite may be true, and an untruthful answer may cause your portfolio to be too conservative, thus stripping you of potential returns.

The algorithms evaluate your will and ability to bear risk according to the investment horizon, your financial situation, knowledge and experience and your risk approach. For example, the longer the investment horizon, the greater the probability of you ending up being profitable with a riskier portfolio, thus gaining greater returns.

Seven years on the market have only gone to show that algorithms work the way they should, and because of this, they haven’t changed since day one.  

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Sometimes, the clients might not be content with the set up, and they would like to bear greater risk (opting for a more conservative approach is always available), but the algorithm won’t allow them to choose a more dynamic portfolio.  

The reason why is simply because greater risk does not fit the investor according to the answers. In such case it helps to review whether you’ve really answered according to your situation. It may sometimes happen that the client states they’d like to invest 50€ a month and then they state it’s their entire wealth.

There Are Things You Should Not Forget 

1) What if my situation changes?

 Finax thought of everything. If your situation changes (e.g. having a baby, or changing your life goals), or you’d like to change your original answers, you may freely do so. Just log into your account and change your answers in the settings, you may furthermore adjust your investment strategy. If you want to know more, be sure to read our older blog. In any case, we always call you to adjust your strategy once a year, as mandated by the law.   

2) What if you are married?

Your answers should consider the financial situation of your entire family. At one point, my wife held the mortgage on my house. That, however, didn’t mean that the mortgage wasn’t my issue anymore as married couples own and manage everything together. So, if you’re investing, remember that the money is common if it’s earned during the marriage.   

3) How does the investment horizon affect your investment strategy choice?

 There’s a general rule: The longer you invest, the greater the likelihood of profit with your return being higher as well. If you’re willing to invest your resources in the long run, the algorithm may suggest a more dynamic portfolio. It goes the other way around as well. The shorter the investment horizon, the more conservative your investment will be.

Notice Regarding Presented Data: The provided data related to the development of Finax portfolios represents a combination of actual performance (from the period after February 2018, when the Finax portfolios were launched) and modeled performance (from the period before the launch) of sample portfolios. The method for calculating actual performance is described in the article How We Calculate the Actual Performance of Finax Portfolios. The method for modeling historical performance is described in the article How We Model the Historical Development of Finax Portfolios. Past results do not guarantee future returns, and your investment outcome may result in a loss. Be informed of the risks you undertake when investing.

4) How does your income and expenses affect your investment

One of the main roles of the robo-advisor is knowing your financial situation. Your ability to bear risk as a client depends on your income possibilities, height of the investment, your net worth and your liabilities. For example, if you decide to invest a larger portion of your wealth, the algorithm won’t suggest 100% equity investment, but it will adjust the risk accordingly.   

5) How to gain knowledge and experience?

If you don’t exactly know what a bond is, a stock or what is the difference between an index fund, a mutual fund and ETF you may go ahead and learn by clicking on the links If you’ve stated that you know what these securities are, you should be aware of the risks involved with each of them, and how do you get the return. If you owned securities in the past or if you participate in voluntary and employee pension schemes and you understand the process, you have experience with the mentioned financial tools.

Can I Trust the Robo-Advisor In Making Predictions About the Returns? 

We have really put a lot of time and care into the algorithm. We are a subject regulated and supervised by the National Bank of Slovakia. That means that we are required by law to provide information that is true and provable.  

Our algorithms are based on statistically processed data from more than the last 30 years. Based on the historical data, we are then able to tell how the situation could develop in the future. However, past results do not guarantee future returns.

Our investment committee has the final word in the displayed predictions. Therefore, our predictions are slightly more conservative compared to the statistics. You may check selected indicators for certain portfolios in the following table, to give you a better idea about the risk and potential return:

P.a. return is modeled annualized return of a strategy after counting in the fees and rebalansing since December 1987.

Expected p.a. return is the annualized return we expect after counting in all the fees.

The pessimistic p.a. return represents the ninetieth percentile in the statistics of historical results, meaning that with 90% probability, you should achieve the indicated return for the given portfolio if you hold the investment for at least 20 years. However, for each time horizon, the algorithm works with a different expected return

Number of >10% drops is the number of drops in a particular strategy that were greater than -10%. For example, in the 60% Equity 40% Bonds strategy there were 7 drops greater than -10% since 1987 and the maximum drop for the entire period was -33,4%.

Robo-advisor was created by a human 

All in all, Finax is a robo-advisor. We provide suggestions and we manage portfolios with minimum human intervention. We offer our services according to mathematical rules and algorithms we designed and optimize regularly.

Unless the client requests it, or if it isn’t necessary, we do not contact the client. What needs to be said however, that all the algorithms are designed completely by Finax and with help from a team of external advisors.  

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