Monday 15 February 2016
7 things you need to know about robo-advice
Monday 15 February 2016
Why the growth in robo-advice should benefit financial advisers
At first, some feared the rise of robo-advice would come at the expense of traditional financial advice. But it seems that, by tapping into new audiences and introducing more people to the value of professional financial advice, robo-advisers present the traditional adviser with more of an opportunity than a threat.
That’s why we’ve come up with seven things we think you need to know about robo-advisers.
1. The term ‘robo-adviser’ can mean different things
Even the oldest robo-advisers, such as US-based Wealthfront, have only been around for just over three years. So what robo-advisers do, and what they’re capable of doing, is still evolving.
For that reason, the term robo-adviser can mean different things to different people: from ‘traditional’ stand-alone investment platforms such as Wealthfront, Betterment and UK-based Nutmeg, through to investment evaluation tools such as FutureAdvisor.
That said, being classed as a robo-adviser generally involves three elements: being online, automated and having no – or at least a very limited – human element when it comes to giving advice. Instead, any advice on where and how much to invest is determined by pre-programmed algorithms.
2. Robo-advisers are becoming more sophisticated
Both sites work by asking users to input details about their finances, goals and risk tolerance. They then apply an algorithm to recommend and implement an investment strategy based on investing in Exchange Traded Funds (ETFs) that track particular indexes. The sites pledge to ‘monitor and optimise’ the portfolio when personal or market circumstances change.
While these platforms offer investors a simple investment solution, robo-advisers are becoming more sophisticated both in the advice they give and the range of investments they advise on.
For instance, Macquarie's OwnersAdvisory, offers investors advice that reviews more than 30,000 investment products around the world, including standard asset classes, cash, fixed income, equities, commodities and alternatives.
OwnersAdvisory will also take into account market insights and the overall health of an investor’s portfolio, as well as the investor’s profile and risk appetite.
3. The robo-advice market is still young
But despite this new level of complexity in robo-advice, the market for robo-advisers in Australia is still very young... and we’re not alone.
Although there are now more than 200 platforms available to US-based investors, their market share remains minimal.
For instance, while both Wealthfront and Betterment now boast more than US$3b AUM1, they remain small players when compared to the US$18 trillion managed by listed investment companies in the United States as a whole.
This could be partly because the take-up rate for robo-advisers tends to be markedly stronger among millennials and Gen Y – who are accustomed to doing everything online – rather than among higher net worth Gen X, Baby Boomers and retirees.
Savvy advisers will be looking for ways to complement and build on the service offered by robo-advisers
4. Robo-advisers are opening new markets for advice
That said, attracting tomorrow’s investors is part of the strategy for some robo-advisers.
OwnersAdvisory will specifically target the large number of Australians who don’t currently receive financial advice. That includes younger investors who don’t believe they’re well off enough yet to pay for the services of a traditional adviser, as well as self-directed investors who want to manage their own investments.
As Macquarie Wealth Management’s Chief Investment Officer, John O’Connell, puts it: “More than 80 per cent of Australian adults don’t currently access professional financial advice. Through Owners Advisory we want to encourage unadvised Australians to become more engaged in managing their finances and investments.”
5. Traditional financial advisers will stay in demand
For this reason, robo-advisers should be seen as a ‘gateway’, introducing people to the benefits of paying for advice rather than as a replacement - or threat - to traditional financial advisers.
After all, traditional financial advisers offer a more holistic approach to wealth management, which integrates investment advice with tax and insurance.
And even if robo-advisers do begin to offer advice that takes into account some of these elements down the track, they will never be able to replicate some elements of what a good financial adviser does – not least because the best financial advisers rely on human skills such as intuition and emotional intelligence, as much as analysis.
Then there’s the reality that a computer can never fully appreciate the complexity involved in family relationships, dynamics and structures when it makes it decisions.
Robo-advisers should be seen as a ‘gateway’ that introduces people to the benefits of paying for advice rather than as a replacement - or threat - to traditional financial advisers
6. The robo-advice market is likely to become a lot more diverse
Despite this, there’s no doubt that the number and diversity of robo-advisers in the Australian market will grow quickly.
Most big financial institutions have announced their intention to launch at least some level of robo-advice. The main dilemma facing these big players is how to differentiate themselves from other providers.
For instance, OwnersAdvisory hopes to stand out through its extensive range of investments options, the breadth of advice it offers, and its flat fee model. It will also let users continue operating on the platforms they currently use to hold their investments without having to liquidate their assets and move them to a new platform.
Other providers may differentiate themselves by offering free up-front advice but will then limit users to investing in the organisation’s own products.
7. Robo-advice will change the advice landscape forever
Whatever model, or models, for robo-advice Australia’s financial services providers choose to launch, it’s almost certain that robo-advice will change the landscape for financial advice forever.
“This is an exciting time for the industry,” Macquarie’s John O’Connell says. “Investors are becoming increasingly empowered by the new opportunities technology is providing to help them manage their own investment strategies online, and they want quality advice and market insights to guide their choices.”
These factors mean that for financial advisers, robo-advisers are likely to pre-qualify leads and deliver clients who already have a taste for advice and better understand both what they want and the value a human can bring to the adviser relationship.
After all, there is also likely to be a point at which a user’s financial and personal affairs could well become too complex for a robo-adviser – at which time that client is likely to switch to a traditional adviser.
That means that savvy advisers will be looking for ways to complement and build on the service offered by robo-advisers.
And, by doing so, they should be able open up whole new markets for their own services too.