Robo-advisory in Islamic investment management

Jun 6, 2018 - Robo-advisors generally offer passive ... Halal investing requires investment ... Passive investment management. • Self-learning algorithms.
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SECTOR FEATURE WEALTH MANAGEMENT

Robo-advisory in Islamic investment management Robo-advisors are substituting their human counterparts in the investment and wealth management business in much the same way that Amazon and Netflix have taken a slice of the pie from retail stores and cinemas. Roboadvisors are digital platforms that provide automated, algorithm-driven, financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invests clients’ assets. AKASH ANAND analyzes how robo-advisory functions in Islamic investment management. Akash Anand is the chief marketing officer and the global head of strategy and sales at Credence Analytics. He can be contacted at [email protected] credenceanalytics.com. Robo-advisors generally offer passive investment strategies focusing on three main areas: 1. Asset allocation and implementation 2. Portfolio monitoring, and 3. Portfolio rebalancing. Currently, there are two main types of robo-advisors: 1. Independent start-ups, and 2. Robo-advisory platforms of established investment companies. A quick survey reveals that roboadvisory is still at a very early stage of its potential. Client-profiling uses simple surveys to assess client needs. Asset allocation, portfolio monitoring and rebalancing are generally not rigorous. However, robo-advisors offer quick and easy account-opening processes and transfer of assets for management. Robo-advisors also offer their services at lower prices. However, current roboadvisors are not likely to meet the needs of sophisticated investors who have even moderately complex financial needs. Robo-advisors were built on the promise of offering wealth management expertise to the masses. Now those start-ups are turning their attention to different and much wealthier customers. Betterment, the largest start-up in the automated financial advisory market, is adding a tool for some clients to adjust investment allocations in more granular ways. The service is limited to those with at least US$100,000 under management by Betterment.

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Figure 1: Phases of growth of robo-advisory

Generation 2

Generation 1

Generation 3 Conversation-based

Generation 4 Passive investment management

• Passive investment • Conversationmanagement Risk profile-based based user • Self-learning • Active funds, asset allocation interface algorithms portfolio and • Built-in interface • Classification investment wit robo-advisory based on machine • Client on-boarding management platforms learning • Risk profiling & • Manage • Interface with • Portfolio asset allocation rebalancing & various optimization & • Consolidated portfolio population automated portfolio view adjustments messaging portfolio • RSS feeds & daily • Goal & investment platforms like recommendation research content planning Facebook Messenger, Skype, etc. Source: Author’s own Goal & investment planning

In 2017, New York-based Wahed Invest started offering its automated investment services across the US after raising US$5 million in seed capital, making it the first robo-advisor to cater to Muslim investors through a Shariah compliant platform, according to its founder Junaid Wahedna.

Halal, socially responsible or ethical investing

The lack of the availability of Islamic investment options for non-high-networth Muslim investors has been a big boon to Islamic robo-advisory platforms. Halal investing requires investment decisions to be made in accordance with Islamic principles. As a faith-based approach to investment management, investors often consider Halal investing to be a category of ethical or socially responsible investing. Halal investment screens help assess whether a company’s business activities

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are Halal or Haram. The screens facilitate the elimination of Haram inve