Founder and CEO of Scalable Capital, Adam French, has slammed Bank of England Governor Mark Carney for throwaway and incumbent biased remarks about robo-advice creating problems for the economy.

In a speech last week at the Deutsche Bundesbank G20 conference on ‘Digitising finance, financial inclusion and financial literacy’, Carney argued that in wholesale banking and markets, robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated.

In an open letter, French noted that in Europe robo-advisers manage around £1 billion, set against the £6.9 trillion in assets the UK asset management industry has. Exposing closet trackers which levy ‘unnecessary fees’ for indexed returns was more important and the real systemic threat was actually the 60-40 portfolios, he countered.

“These portfolios suffer from herding and channel many clients into exactly the same positions. Without the use of technology, there is no way to provide truly individualised portfolios that will be adjusted differently in changing market environments,” he wrote. “The established players therefore have to make shortcuts and as such people get placed in exactly the same portfolios that are adjusted in exactly the same way as conditions change. That means that in addition to a substantial portion of “actively managed” funds being no more than index-trackers in disguise, the traditional approach of model portfolios leads to herding on a huge scale.”

He concluded: “I felt obliged to write this letter as I wholly believe that comments based on a lack of information and playing in the hands of the incumbent asset management industry are extremely damaging to retail investors. The status quo is broken and, even worse, investors do not even know due to the lack of transparency. By making throwaway remarks like this there is a danger we will be stifling innovation when it is needed the most.”

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by Scott Thompson
Scott is Senior Editor at IBS Intelligence. You can follow him on Twitter and contact him at: Scott.Thompson@ibsintelligence.com
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