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Information which helps you to invest properly.

What Is a Robo-Advisor?

How does it function? What algorithms does it use? Set up your Finax account correctly to avoid future inconveniences.

Juraj Hrbatý | Our process | 8. October 2019

Finax Is a Robo-Advisor

The first robo-advisors were established in the USA back in 2008. Their job is to help small investors and financial agents choose the most suitable portfolio composition. Most robo-advisors recommend passive investing with rebalancing (automated adjustments of portfolio composition).

The cost of professional labor is usually responsible for high prices of investment services. By eliminating these costs, robo-advisors significantly reduce investment fees, increasing the customers’ net profits.

Finax is the first robo-advisor offering its services in the CEE region. In comparison with our competition in Europe, we have gone much further in terms of customer advisory. We are one of few, if not the only robo-advisor that also offers its services through external advisors – financial agents.

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Moreover, financial agents help clients understand and manage their personal finance in exchange for a fixed fee.

Providing information online and automating processes allows us to offer our services at a significantly lower price. We have also published FAQ on our website with the aim of decreasing the workload of our employees, which results in lower fees for our customers.

However, if you have any questions, feel free to call us or write us an email. You can also utilize our live webinars to ask questions or make suggestions.

How Do the Algorithms Function?

First and the most important prerequisite for choosing the ideal portfolio for you are true answers to the questions asked in our questionnaire during the investment setup phase. The answers influence the risk profile of your investment; therefore, it is very important to answer them according to your current plans and life situation.

The questionnaire is our only source of information for a correct setup of your investment, which should often last for decades.

Answers that do not match reality can lead to a sub-optimal setup of your investment's risk. In the case of a market crash, a wrongly set risk profile of your investment can leave you unable to withstand the pressure, making you close your position.

Closing a position during a market crash is one of the biggest mistakes investors make. To invest successfully, it is paramount to stick to the investment horizon you set at the start. This time period is an important variable for choosing the most suitable portfolio for you.

Additionally, false answers can also lead to a portfolio that is too conservative and will deprive you of higher profits.

Algorithms individually asses your ability and willingness to undertake risks based on the investment horizon, your financial situation, experience, and attitude towards risk. For example, the longer your investment horizon, the higher the chance that your investment will result in profit even with a riskier portfolio. Hence, you can afford to bear more risk, getting rewarded by higher returns that our riskier portfolios earn over longer periods.

Each year of Finax's existence has proven that our algorithms are set correctly. We have made no changes to the algorithms since they were launched.

Our clients sometimes want to change their investment strategy. You can always choose a more conservative portfolio than suggested by our algorithms, but they will not allow you to choose a more dynamic one than suitable based on your risk profile. In such a case, check whether you provided correct answers in the questionnaire. For instance, a client might want to invest 50€ each month, but at the same time states that this amount represents their entire fortune.

Average annual return of our 80/20 portfolio (80% equities, 8,57% p.a.) is only 0.4% lower than that of our 100/0 portfolio (100% equities, 8,99% p.a.). However, it bears a significantly lower risk (annual portfolio volatility of 80:20 strategy is 14,8%, while 100/0 strategy has an annual volatility of 17,4%). Therefore, the 80/20 strategy achieves a higher weighted return.

Some Things You Should Not Forget About

1) What if my situation changes?

At Finax, we have thought about everything. If your situation changes (e.g. birth of a child or a change in your life plans) or you just want to modify your original answers, you can always change them in the settings section after signing into your account. You can also adjust your investment strategy in the Advisory section. In any case, we will remind you to reconsider your investment profile every year, as we are obliged to do so by the law.

2) If you are married

Your answers should reflect the financial situation of your family. For instance, if the mortgage on your house is solely in your wife’s name, that does not mean it has no effect on your financial situation. Married couples have joint liability over financial obligations and joint ownership of money and assets acquired after marriage. You should keep this in mind when making investment decisions.

3) How does the investment horizon influence your optimal strategy? 

The basic rule of investing is that longer investment horizons result in a higher chance of profit and higher returns. If you are willing to invest your money for a long period of time, the system may recommend a more dynamic portfolio. It also works the other way around. In case you are planning a shorter investment horizon, your investment will be more conservative.

Aká je šanca, že zarobíte s portfóliami finax na rôznych horizontoch a koľko?

The effect of income and expenses on your investment

One of the basic tasks of robo-advisors is to understand your financial situation. Your ability to tolerate risk depends on the types of income you earn, investment amount, value of your assets, and financial obligations. For example, if you decide to invest a significant share of your wealth, the algorithm will not recommend a 100/0 strategy, but it will adjust the risk accordingly. 

How to leverage your knowledge and experience?

If you are not familiar with the precise functioning of bonds and stocks or with the differences between index ETFs and mutual funds, you can learn more by browsing our website. If you state in the questionnaire that you know what these securities are, you should also be aware of the risks they bear and what are the sources of their returns. If you owned securities or funds before, or if you are part of private pension schemes and you understand the principles behind them, then you can state that you have experience with these financial instruments.

Can I Really Expect to Earn the Return Forecasted by the Robo-Advisor?

We did our best to make our algorithms as precise as possible. Our operations are overseen by the National Bank of Slovakia, which means that we have to provide our clients with true, verifiable, and provable information.

Our algorithms are derived from statistical data spanning over the past 30 years. We are able to forecast the future appreciation of the client’s investment based on historical data; however, past returns do not guarantee future results.

Our investment board has the final word in our forecasts. Therefore, our predictions are more conservative than the long-term statistics. In the following chart, you can see parameters of specific Finax portfolios. Inspect them to get an image of expected risks and potential returns.

Aká je šanca, že zarobíte s portfóliami finax na rôznych horizontoch a koľko?

Return p.a.

Is the modelled annual historical return (after fees and with our rebalancing over the past 30 years).

Expected return p.a.

Is the expected annual return (after fees and with our rebalancing).

Pessimistic return p.a.

Represents the 90th percentile of historic data statistics, which means that you will achieve at least the stated results with 90% probability on an investment horizon exceeding 20 years.

Number of drops > 10%

Number of market drops over 10% for the particular strategy. For example, the 60% stocks and 40% bonds strategy had 5 drops larger than 10% over the past 30 years. The maximum drop over the past 30 years was 33.4%.

Robo-Advisor Was Made by Humans

All in all, Finax is a robo-advisor. We recommend and manage customers’ portfolios with a minimum of human interventions. Our services are based on mathematic rules and algorithms which we created and regularly optimize.

We do not contact clients unless it is necessary or requested by them. However, it is important to say that all the algorithms and processes were fully designed by Finax with the help of our team of experts.

Juraj Hrbatý
Juraj Hrbatý
Chief Executive Officer
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