Technology of the week – The algorithm can do it better
Do you have your own wealth manager? Probably not, as you need an average capital of about £650,000 to make a wealth manager even notice you. Traditional wealth managers are only interested in the super rich, not the average Joe. A young company called Betterment is taking a different approach. They will invest your money, even if you bring just $100 to the table. How are they able to do this? And are the background techniques also applicable in other industries? Keep on reading to find out.
Betterment: your money in the hands of a robot
Betterment is an American company offering an automated investment service, a so called ‘robo adviser’. It provides customers with automated online investment portfolio advice and management. The current wealth management industry is portrait by traditional large investment and private banks offering personal financial services to high net worth clients.
By using algorithms to generate advice and to manage portfolios, Betterment does not need human financial advisers, enabling the company to offer its services at a fraction of the price of traditional financial services. Where a traditional wealth manager charges about 1-3% in annual fees (The Economist, 2015), Betterment charges just 0.35% (Betterment, 2015). Customers answer a basic questionnaire to define their goals, risk preferences and income, after which the company’s software tool generates a personalized investment advice. Due to this automatic software tool, Betterment is able to deliver financial advice at a lower cost, reach a larger customer base and invest at in a more tax efficient way than traditional wealth managers. However, compared to the traditional wealth manager, Betterment does not give you a comforting call when the markets crash and your retirement loses half of its value…
SciSports: an expert in football player statistics
A similar algorithm is found in SciSports, an innovative tech start-up that focuses on statistical analysis the football industry. In 2012 three students from the University of Twente named Giels Brouwer, Anatoly Babic and Remko de Vries founded the company SciSports with the goal to revolutionize the way football clubs scout and buy their players. Football clubs use the services of SciSports to gain a better insight in which players they should attract to their club based on statistics. At the moment the most common method is an internally set up scouting network that includes several scouts all over the world with each have their own networks who scouts players based on intuition and ‘football know-how’. SciSports offers a statistical approach to the scouting of football players using a self-developed algorithm, which extract relevant statistical information from large sports databases. The advantages of the SciSports model are the low costs, a bigger network and faster advice. SciSports model does not account for all human factors and there is some information asymmetry (SciSports, 2015).
Betterment vs. SciSports: a comparison
When we take a look at these companies we see that both use a developed algorithm to provide their services. What makes both technologies comparable is the link between their algorithm, input and reaching an optimum solution. The major difference aside from the different industry is the result of the services of both companies. Betterment has the last say in the investment and not the customer, who only can deliver input. SciSports can only give advice, but the decision to buy a player is still made by the club.
Betterment, (2015). Betterment | Investing Made Better. [online] Available at: http://www.betterment.com [Accessed 12 Sep. 2015].
The Economist, (2015). Ask the algorithm. [online] Available at: http://www.economist.com/news/special- report/21650292-human-wealth-advisers-are-going-out-fashion-ask-algorithm [Accessed 10 Sep. 2015].
SciSports | High tech sports company, (2015). SciSports | High tech sports company. [online] Available at: http://www.scisports.com [Accessed 10 Sep. 2015].
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