How Can Robo Advice Reduce The Cost Of Investing?

How Can Robo Advice Reduce The Cost Of Investing?

Is investing on your list of to do’s in 2016? If you answered yes, then you may want to take a look at the innovative wealth management service, called Robo Advice. To learn more about how it works and what’s involved, we asked Director & CEO of ProAdviser.com.au, Nikhil Sreedhar to give us a full rundown:

If you have recently embarked on a Google crusade to research investment advice services, chances are you would have come across the term “robo-adviser”.

Within the wealth management space, the term ‘robo adviser’ is being wildly used and still many financial executives do not completely grasp what a robo adviser does.

So, what is a robo adviser and how do they reduce the costs of financial advice?

According to Wikipedia, a robo adviser is a “class of financial adviser that provides online portfolio management with minimal human intervention”. A robo-adviser is an online platform that uses algorithms to determine the asset allocations for investors and manages their investment monies with very little human intervention. Rather than having a human adviser actively manage the investments (a very expensive option), robo-advisers leverage technology to drastically bring down the costs of investment advice.

On face value robo advice is already an exciting disruption to the slow and lazy industry that is wealth management. And according to research by A.T Kearny, robo advice gets even more sexy, as they project that approximately $2 trillion will be managed by robo adviser platforms in the next 5 years!

Now where does that leave you (the consumer) when seeking investment advice? Here we have outlined some of the reasons why investors choose robo advice and how robo-advisers bring down the costs of investing.

Why Choose a Robo Adviser?

The main driving forces behind the explosive growth of robo-advice in Australia are independence, low account minimums and increased transparency.

Clients Best Interests (independent):

While Australia has some of the most robust financial systems in the world, the inherent complexities has made it difficult for every day Australians to understand their money.

It is very easy for customers to differentiate between different types of cereal, but financial products can be tricky. This information gap has made it possible for finance executives to charge a premium for their services.

Robo-advisers don’t believe this is fair and tackle this consumer issue by leveraging technology to simplify the investment process for clients. Robo advice technology is very easy to understand and allows for investment within 24 hours.

Low Account Minimums:

Furthermore, many traditional financial advisers require investors to have minimum account balances of $100,000 or more to start investing with them. And if this is not possible, they try and sell customers other financial products such as insurance or mortgages to justify their high fees.

Robo advisers have investment minimums in the low 4 digits and some like ProAdviser have none! This means that a whole new market of first time investors can now access professional expertise that they normally would not have been able to.

Increased Transparency:

Over the past 10 years there has been a growing trend in the number of people investing themselves. According to the ASX Share Owner Study in 2015, 36% of the population or $5.94M million Australian investors have broking accounts and invest directly in the share market.

At the same time, only 10% of investors indirectly invest in the share market through the unlisted managed funds and structured investment products. This has fallen from 32% in 2004!

This change in demographic shows that investors are seeking more control and transparency over their investments and robo adviser’s deliver exactly that. All of the investments in a robo adviser platform are beneficially held in the client’s name and the platforms are able to drill down into your portfolio and show the investments line by line.

How does a robo adviser bring down the costs of investing?

Robo advisers have automated the following 3 aspects of a traditional financial adviser’s role. Because the marginal cost of technology is so low a robo-adviser is able to provide high value investment management at a price point that no traditional adviser can compete with.

Investment Selection

Traditional financial advisers will spend majority of their week bogged down with investment administration, creating advice documents and chasing up on paperwork.

On the flipside, Robo advisers are a completely automated and paperless service. We now spend more of our time on value added projects which includes reviewing the investment universe for low cost Exchange Traded Funds (ETF).

Reinvestment & Rebalancing

When your investment portfolio receives distributions or when you decide to contribute additional monies, robo advice software will automatically rebalance your portfolio back to its target asset allocation.

Traditionally this would be a long process involving the following steps prepared by a human financial adviser:

  • Adviser download clients portfolio report from broker
  • Adviser convert the data into Microsoft Excel format
  • Adviser input some formulas to see investment recommendations
  • Adviser confirm the recommendations in an advice document
  • Adviser delivers advice document to the client
  • Client approves recommendations in the advice document
  • Adviser receives the signed advice document
  • Adviser places trades with the broker

This why a human financial adviser can cost upwards of $2,000 per year.

Very Low Brokerage

Like any technology company, robo advisers get cheaper and cheaper to run with volume. Since robo-advisers look after thousands of customers, the brokerage costs they pay can be negotiated down to very low rates.

For example, with ProAdviser, if a $1,000 trade is executed on a client portfolio, the brokerage will only be $0.83. This is 24 times cheaper than Commsec, which would cost $19.95 for the trade to be executed.

Pitfalls of Robo Advice

At the moment robo-advice is only limited to investment management. Investors who need help with complex matters such as estate planning or SMSF strategy may want the hand-holding that comes with a human financial advisor.

For many investors, however, robo-advisers offer a way to grow create wealth without getting hit with the high costs of traditional financial services.

 

How Can Robo Advice Reduce The Cost Of Investing? was last modified: April 18, 2016 by Nikhil Sreedhar

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