Robo Advice: What is it and is it worth it?
Following the Hayne Banking Royal Commission many Australians are understandably concerned about where they can find good quality investment advice.
The Commission was scathing about the quality on some major investment advice groups which were generally associated with the big banks. For many it begs the question… “who can I trust with my money”.
I think two things are likely to happen; there will be a shift away from the big institution owned financial advisers to smaller independent firms which have a better connection with clients; and there will be a shift to online advice platforms or so-called Robo Advisers.
I’ve always said your best investment is good advice. I have also said that while you can delegate responsibility for your money to an adviser, you must never surrender that responsibility. In other words, yes get an adviser but you must also take the time to always be fully informed about what decisions are being made because the buck has to stop with you.
When choosing an adviser, make sure you complete the right due diligence on making sure they are right for you and have appropriate qualifications. I’m a big supporter of Adviser Ratings (www.adviserratings.com.au) which assess individual advisers and allow their clients comment and rate the service they receive. It’s a sort of TripAdviser for financial planners which I helped establish.
Many Australians are also using online digital advice platforms, or Robo Advisers, to better manage their money and educate themselves on financial planning options.
Following the Royal Commission recommendations, access to advice may get harder and more expensive. Currently the average client of a financial adviser has a portfolio valued at around $600,000 and pay fees of 0.6 percent ($3600) a year.
Online platforms can be an alternative for those who have smaller portfolios or those wanting more autonomy.
Robo-advice can also sometimes be referred to as smart tools, personal finance applications, or digital advice. The need for all these terms is because there are a wide range of services provided and they do many different things.
While these types of platforms are viewed as a disruptor to the traditional advice industry, in reality it is helpful to both advisers and investors to, and given the nature of our “always on” society, these tools are available 24/7 for whenever needed.
They may not be for everyone, but there are actually a number of potential benefits to putting your faith in a Robo-adviser as opposed to a humans.
The first is most obvious: they are cheaper than a traditional fund manager because you’re not paying someone to look after your cash. It’s a pretty simple equation when it comes to investments; the less you pay in fees the more money will end up in your pocket.
Of course, cheaper doesn’t always mean better.
Secondly, there are some things machines can do better than humans. In particular, a computer can turn off emotional and behavioural bias, meaning a machine will never be clouded by emotion or greed.
Robo-advisers simply make objective recommendations on where to invest based on proven investment theory and the instructions of what how you want to invest.
Most of the online advice platforms have an extensive range of useful tools and calculators to help you build a plan of what to do. Many also use Exchange Traded Funds(ETF’s) as their investment solutions based on your risk profile and objectives.
Some of the bigger Robo Advisers available in Australia are;
.Raiz (formerly Acorns)
Raiz (formerly known as Acorns); users link up their bank accounts and credit cards, and rounds up all their transactions to the nearest dollar and invest this amount into an ETF portfolio. A sort of electronic piggy bank which takes any spare cash you want to invest as well. Rather than investing in ETF’s, Raiz is structured more like a regular managed fund.
Offers 5 ETF porftolios, and each investor is setup with a Macquarie Bank Cash Management Account (CMA), and ETFs are traded under the individual’s own Holder Identifier Number (HIN) in a Managed Discretionary Account (MDA). The signup process includes a Statement of Advice which outlines their recommendations. A Stockspot portfolio can be setup with a minimum of $2,000.
an automated savings and investing platform that uses a passive and diversified investing model based on Modern Portfolio Theory. Their portfolios utilise transparent and low-cost Exchange-Traded Funds to optimise after-fee risk-adjusted returns.
an online broker/adviser offering free and subscription tools and resources. Offers portfolio management capabilities, research and advice and managed investment portfolios across a range of risk profiles and specialties.
aimed at younger investors with as good focus on financial literacy covering everything from budgeting and developing good habits through to investing and savings plans. Rebates commissions paid on investments made.
allows you monitor and track all your bank accounts and investments plus provides access to over 200 financial institutions. Like their Bill Watch and expense tracker and the ability to customize tools that solve specific problems for you.
consolidates all your banking and credit data in one place and then categorises spending for easy budgeting. Also sends out alerts when bank fees are charged or when you are reaching your spending limit.
calculates and helps retirees apply for the aged pension and provides alerts for any changes in rules. Very comprehensive and easy to use.