“Digitalization is Democratization”

by Natascha Zeljko

An Interview with Salome Preiswerk, founder and managing director of Whitebox, a leading German digital wealth manager

For beginners, briefly explained, how does a Roboadvisor work? There are many myths about this.

Yes, that’s true. What a Roboadvisor is or how much “robo” is in a Roboadvisor is indeed a very good question. There is no universal definition—the lowest common denominator is that the path from an interested party to an investment proposal is always digital. Otherwise, the differences are significant. The most important thing is the actual portfolio management, and there are a lot of myths about that. It is not the case that an algorithm gone wild independently rearranges a portfolio and buys and sells things. Neither is there AI – at least not “real” AI in the sense of once set up, the thing runs by itself. That doesn’t exist in our field.

And in the future? What is conceivable?

Even if nowadays every algorithm, no matter how simple, is sold as AI: we are still a long way from artificial intelligence or self-running algorithms that do anything without human intervention. This idea of a robot that invests money for us completely autonomously has not yet reached that stage. So far, all purely quantitative models have failed. Of course, you should never say never. But I think it will at least be difficult to develop a robot that is better than the mixture of robot and human being.

So you guys are quite a hybrid.

Yes, when it comes to portfolio management wecombine man and machine. With our value approach we select the best investment opportunities from over 300 asset classes, regions, and sectors and combine them into a robust portfolio. This is implemented with passively-managed, exchange-traded index products—so-called ETFs. We do this with many small robots, but also people who manage them. More “hybrid” will also be seen in customer acquisition and support. Traditional players will become more digital, digital players more human.

Where is the human inferior to the machine?

Factors that turn out to be unfavorable when investing money are emotions, opinions, gut feeling, scenario thinking. A machine can disregard all this. Conversely, human reason can compensate for the insufficiency of machines. We believe that such hybrid models lead to success.

Speaking of emotions: it is claimed that the worst thing is to fall in love with a certain stock and hold on to it against better knowledge. Is that true?

I would put it this way: if I fall in love with a share and that leads to me keeping it for a very long time, even in bad times, then that can also lead to a good result. The much bigger problem is the opposite case: that the emotion entices me to sell at a bad time. In fact, there is hardly a bigger investment error than not sitting out a temporarily bad phase and turning a theoretical loss into a real one. Otherwise, there are countless studies that show that emotions in investing—whether amateur or professional—do not lead to positive results. And by that I mean statistical relevance. Of course, you can gamble from a gut feeling and be successful with it. Then success seems to prove you right in retrospect. But that’s not a sustainable investment strategy, that’s roulette.

Why are stocks and funds still so unpopular in Germany?

I think there are a number of reasons. One is structural; for example in education. For a long time, because of a functioning pension system, it seemed there wasn’t a need; it was neither directly nor indirectly promoted by the state. One could even say: possibly prevented. And then there is perhaps something like a typical mentality of a country. Even if, as a Swiss, I am not entitled to presume an opinion and don’t want to analyse the Germans on the psychiatrist’s couch, what I notice is that the Germans are rather risk-averse. Sometimes bipolar. On the one hand, they are desperately holding onto their savings book and accepting negative return, whereas on the other hand, they gamble and, for example, go in droves into closed-end ship funds. There seems to be nothing in between. And that’s exactly where reason would lie, in the middle. Something—in quotation marks—“boring” like us. A global, broadly diversified portfolio to manage risk.

The financial market is influenced by many variables, one of which is the political context. To what extent do digital systems react differently than conventional systems in terms of flexibility?

This, too, is a typical robo myth. Digital providers do not operate on the basis of models that do not exist in the traditional world. It may come as a surprise, but most do nothing in times of political change because they work with static model portfolios. At Whitebox it is as follows: we observe world and market events, of course, but we would never immediately restructure the portfolio due to an anticipated or real political change. That would be problematic scenario thinking. I do not structure my portfolio according to whether Trump or his Brazilian clone is elected or not. I try to position my portfolio well for many scenarios. Only when our medium- and long-term assumptions change do we adjust the portfolio structures, but then we do. As active as necessary, as passive as possible. There are a few providers who try to predict highs and lows and, like laymen, usually fail because of this. These short-term risk models do not work. Because they are too expensive and ultimately cost customers too much return.

What is a good return?

You can’t quantify that. That’s relative. It’s basically like this: you buy your return through risk. A good return is when I have taken as little risk as possible for this return. Or conversely, I have made as much return as possible for the risk I have taken. There is no zero risk investment. You should also aim for a realistic time horizon. So, don’t look at the whole thing over a few weeks or months, but at least in the medium, if not in the long term.

What fascinates you most about fintech?

This may sound pathetic—but it is actually the desire to offer the best investment solution to as many customers as possible and not just a small elite. And that ties back to the fear of investing in stocks—the scepticism may also be due to a lack of reasonable offers. People were told to jump into stocks head over heels. But they thought: how, what, where? Because there was nothing meaningful. Digitization is, to a certain extent, also democratization.

What do you want for the future?

Digital wealth managers are about to grow from a niche to a mass product. This will automatically lead to even more democratization, as the client base will demographically expand. Of course, women are also an issue here. We have already improved from 95% men to currently only 85%. That is developing in the right direction. But until our service has diffused into broader social groups, there is still work to be done.

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