Originally published by OpenMarkets
Robots have long featured in sci-fi and cartoons; a quick Google (NASDAQ:GOOGL) search informed me human interest in bots can be traced back to ancient China, where a text describes a humanoid able to mimic human operations. But can you imagine the robots we’ve grown up with offering financial advice?
…Arms swinging wildly, ‘Robot’ from Lost in Space – “Danger Will Robinson, your investments are tanking”
…Or the morose ‘paranoid android’ Marvin of Hitchhiker’s Guide to the Galaxy fame – “It’s all gone, I lost your money. In fact, I did it so badly you owe money. Lots of money.”
…Or the mischievous Bender from Futurama – “Give me all your money, I’ll look after it…woohoo”
Luckily for us humans, robo advice does not involve robots. So, while robots of all descriptions are being developed to fulfil a range of needs, financial advice is not one of them.
What is robo-advice?
The ‘robo’ in robo advice refers to the fact that humans are not involved in the investment process. To quote from ASIC’s Smart Money site, robo advice is:
“…financial advice delivered online via computer, tablet or smartphone. It uses algorithms and technology in place of a human financial adviser.”
Importantly, humans do design the algorithms on which the robo advice is based, so it’s therefore important that any robo is analysed in the same way you’d assess an investment manager, to ensure the IP behind the algorithms stands up to scrutiny. The algorithms direct an investor into one of several portfolios after asking a series of questions to determine basic parameters – primarily investment goals and risk tolerance. The portfolios are typically comprised of exchange traded funds (ETFs), although some robos offer a broader range of investment options.
Humans also provide the support and communications that go with robo-advice…so there is most definitely a human element to the process, albeit less than the traditional advice model.
What robo can’t do
While robo advice might provide a neat, low cost alternative to traditional financial advice, there are a range of things it can’t do:
- debt management and budgeting
- tax planning
- estate planning
- life and other insurances
- managing the effects of investments on Centrelink benefits, or dealing with changes to Centrelink entitlements and tests
- explaining regulatory change to clients – for example, the significant changes to super that were introduced on 1 July 2017 – and helping them organise their investments accordingly.
A robo platform also can’t offer a cup of tea, read body language (are you really that risk tolerant?) or ask more in-depth questions around goals, financial objectives and risk tolerances. It won’t account for changes in circumstances due to illness or injury, a maternity or paternity break, or a leave of absence to climb lofty peaks. Interestingly, most robo services don’t ask about other investments, which may result in a total investment portfolio that is not as appropriately balanced or diversified as it should be.
Regardless, it’s an appropriate choice for some investors, and where embraced by financial planning practices, can free up advisers and relevant staff to deal with those matters that require the human touch.
Robos in the Australian market
According to Investment Trends’ Financial Advice Report 2017, the number of consumers engaging with financial advice has fallen by 25 per cent over the past decade; this likewise represents a decline in the long-term average that 20 percent of Australians seek advice, with the new figures closer to 12 percent. This is despite an ageing population with record numbers of baby boomers expected to retire over the coming years.
Why are consumers failing to engage with financial advice? Cost. Investment Trends found that the average price Australians are willing to pay for advice is $750, compared to the $2,500 that advisers estimate as the cost of delivering financial advice. That’s quite a disconnect.
While this is not the forum for a discussion of the myriad of costs that comprise advice fees, regardless of their justification, there are – and will always be – a section of consumers that aren’t willing (or able) to pay.
According to website Statista, robo advisers have assets under management of US$225 on a global basis. Anticipated growth between now and 2021 is 47.5%. While much of those assets and that growth is US domiciled, Statista anticipates an Australian growth rate of 59.1% over the same period, albeit from a much lower base. Banks and super funds jumping on the robo bandwagon – it won’t be long before the outlier becomes mainstream.
A brief overview of Australian-based robo advisers
Who’s going robo?
I spoke to Pat Garrett, CEO of Six Park, to get a snapshot their typical user. A consumer oriented robo, Six Park has proven popular with SMSFs; Pat believes this attraction has arisen because of the experienced Investment Advisory Committee and its oversight of investment decisions.
A snapshot of Six Park’s average investor:
- Aged 40, but spans 18 years to 72 years.
- Male, only 25% of clients are female
- Approximately 20% are SMSF trustees
- Approximately 50% of assets are SMSF assets
- Average account size is $100k.
The 2016 Investment Trends Robo-advice Report surveyed 9,000 online share investors and 1,450 advisers and found that 48 per cent of the adult Australian population have unmet advice needs relating to investing, tax, and retirement planning. Taken together with the Financial Advice Report 2017, it’s clear there’s a sizable gap between those who need advice and those who provide advice. Robo might just be the mid-priced advice option for many.
Interestingly, the Robo-advice Report reported that the US experience has found that robo-advice is not limited to younger, tech-savvy investors – as Six Park has found, even those in retirement use robo.
Why robo?
Irrespective of the things robo can’t do, algorithm-based advice based on IP from humans with investment knowledge and experience is much better than no advice – or worse, advice from well-meaning but unknowledgeable friends, family or uber drivers. There are other things going for it too:
- Robo is low cost
- Robo is transparent, and most offer apps that enable investors to view their portfolio anywhere, anytime, on PC, tablet or phone
- Robo portfolios are regularly rebalanced
- Robo provides an effortless way to construct a diversified portfolio
- Importantly, robo keeps investor costs low – costs, like returns, compound over time.
While some financial advisers might find robo advice threatening, it can be seamlessly integrated into an advice practice to provide investment services to some or all clients, and free up the humans to provide the services that robo can’t. Imagine, with the huge leaps in machine learning (think driverless cars) what could robo advice do next?