Logging on to the future of financial advice
For hundreds of thousands of investors around the world, the future of financial advice is already here. There is as much as $US300 billion ($392 billion) of funds under the management of robo advisers – computers powered by algorithms that can buy and sell on your behalf – with that figure expected to rise to $US2.2 trillion by 2020.
To put that into perspective, these robo advisers could buy every company on the Australian Securities Exchange and still have a trillion dollars left over.
While not all robo advisers have the authority to buy and sell, and others are rebadged offerings, the benefits of digitising and automating some of the less profitable processes and procedures loom large for the financial advice industry.
Over the past 12 months, momentum behind the sector has picked up as industry heavyweights such as Vanguard have engaged in a land grab, reporting that it has $US42 billion ($53 billion) under its robo offering, Personal Advisor Services.
Once characterised by a collection of nimble start-ups, the arrival of traditional wealth management giants such as the world’s largest asset manager, BlackRock, and Australian powerhouse Macquarie, has signalled a new phase in its evolution.
At the same time, questions are emerging over just how effective these tools are, with many traditional players querying their usefulness and the robustness of the formulas that underpin their services. Others that arrived in a blaze of publicity have seemingly shut their doors overnight.
So what exactly is robo advice, and could it work for you? To answer these questions, let’s first examine some of the different flavours of robo advice out there and explore the pros and cons of each.
For a nascent industry like this, it may come as no surprise that there are heated debates over what it should be called.
Those who see the role of the computer as merely to obtain new clients or assist traditional advisers with fact-finding tend to prefer descriptors such as “digital advice” or “robo asset allocation”.
Others take a less charitable view of the latest buzzword. Jason Komadina, general manager, products and investments at Perpetual, which has been managing wealth for Australians since 1885, remarks: “Some might say many robo advice platforms out there are just distribution channels for ETFs [exchange traded funds].”
It’s a criticism of certain brands of robo advice that ask investors to sit through a questionnaire, then use the results to recommend a blend of low-cost ETFs based on the subjects’ investment horizon, risk tolerance and available capital.
Wealth managers who cater for the higher end of the market argue that this level of advice is only suitable for clients with the most basic needs and that humans, put simply, do a better job of managing the risks.
That view is being sidelined by those who are attracted to the consistent outcomes produced by computers and the opportunity to automate the often costly service that is face-to-face financial advice.
John O’Connell is the founder of OwnersAdvisory, a full-service robo offering backed by Macquarie Group, which was launched in February this year.
“Robo advice is a derogatory term that fund managers use to give it a scary, dystopian feel. What we are offering is true advice,” O’Connell says.
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