Robo investing platforms have been gaining much traction in the past few years. Their proposition is admittedly elegant because all the consumer does is to deposit some cash into their application or platform and their capital will just somehow grow over time. What consumers do not realize are the potential schemes used to keep investors on board and not withdraw any funds. In this post, we will attempt to analyze possible tactics used to tug the heartstrings of consumers using Robo investing platforms and explain why there is a risk tolerance involved.
4 Basic Stages of Robo investing
- “State of Euphoria” Stage
– Gain positive yield without having to do anything
– “If I hold longer, I will definitely get more” - “Still not bad” Stage
– Yield dropped a little but it is still better than bank interests
– “Investments have its ups and downs and I accept the risks involved” - “Crisis State”
– Trade War, Pandemic, Geopolitical Instability serve as triggers to justify falling yields
– “Can’t complain because of the current situation around the world” - “Small loss only” Stage
– Not too low to make consumers feel like withdrawing their funds but reporting positive yield is not possible at the moment
– “Not withdrawing was the right thing to do as I would have lost more if I did”
These 4 stages are the kinds of scenarios that Robo investing platforms are likely to use to manage their clients emotions. Basically, it is about keeping their portfolios within a certain margin that has been proven that consumers at that age, financial situation and education level will not too satisfied or dismayed by the returns as shown on screen.
Risk Tolerance (Calibrating Greed and Fear)
Consumers assume that by increasing the risk tolerance of their accounts, they are likely to gain higher yields because the algorithms will then invest in higher-risk assets like undervalued high yield bonds or stocks. In reality, all it does is to increase the amplitude/range of the green and red shaded area because they understand that consumers who have selected this risk profile are more likely to hold even when they have achieved higher yields than lower-risk portfolios and top up their accounts to rebalance when their portfolios are not doing so well. Additionally, these results as shown on screen and expectations are also rigorously tested to ensure that customers do not speak ill about the platform’s services. If anything, they are supposed to keep their clients vested in their platforms and rave about how easy it is to invest without doing anything.
Sustainability of Scheme
Robo investing platforms uses big data to study the emotional and mental state of savers and investors to understand how to keep them vested. On the other hand, these platforms will also have to expect withdrawals made at any given time. Therefore to ensure sustainability and profitability, these platforms have actually calibrated the rate of returns and yields to a level that is affordable for the platform to lose. This is made possible because consumers who select a higher risk portfolio are also likely to deposit smaller amounts of funds in the hope of getting back higher absolute returns as well as managing their losses. This ensures that even during a bullish market, the platform can still afford to “cash-out” and pay the returns in addition to the original capital vested to consumers.
Closing Thoughts
To conclude, I think it is important to understand how these platforms keep their clients vested to stay viable and profitable. While I am not suggesting that there is massive tampering with the yields on screen, there is certainly a reason to question those yields because they are not reflective of any real-time portfolio value. That is why many long time investors are still wary about using such platforms. That said, there are not many alternatives to Robo investing platforms other than actually investing in financial products or equities/bonds itself so there are really not many options for risk-averse individuals. My suggestion for younger individuals is to invest small amounts to gain experience about investing in stocks themselves and slowly increase their portfolios as they become more savvy and resilient investors.
