You have a legal claim against a true robo-advisor for incorrect advice – Magda Wierzycka – Sygnia Asset Management.
Click to listen: Sygnia's Magda Wierzycka on SAFM Market Update
SIKI MGABADELI (SM): We are focusing on a hot topic at the moment – robo-advisors – and show you how to tell the difference between a robo-advisor and a financial calculator. To help us do that we have the CEO of Sygnia Asset Management, Magda Wierzycka.
Magda, thanks for your time today. There’s been a growing interest in robo-advisors and I think this is a conversation we’ve had on the show a couple of times. What do you think, firstly, is behind that interest in robo-advisors?
MAGDA WIERZYCKA MW): I think robo-advisors are making the provision of financial advice easily accessible. People are interested in how to save, people are interested in how to invest. And robo-advisors are effectively providing the advice for free. So you’ve got no pressure to buy. You are effectively just answering some questions on the website and that guides you towards an investment strategy. I think people are searching for that in this kind of low-return, high volatility environment that we are experiencing in the investment markets. I think people are becoming a lot more cost-conscious and robo-advisors talk to to that effectively.
SM: Yeah. But finding a website to tell you what your risk profile is by answering a couple of questions and what you may or may not be interested in is not necessarily new. So what sets robo-advisors apart?
MW: In South Africa the robo-advisory market is very new. In the US and in the UK it’s a lot better established. But what’s starting to differentiate robo-advisors from each other is the extent to which what happens on that website, once you’ve answered the questions, is real advice, and the extent to which it is just a teeny, tiny projection or calculation based on a couple of pieces of information.
So a true robo-advisor should provide you with what constitutes financial advice and it should stand behind that advice. So if that advice is incorrect, you actually have a legal claim against the robo-advisor for the lack of correctness of the advice it has provided.
SM: And what constitutes legal advice?
MW: Legal advice effectively needs to take into account more information than most of these kind of calculators ask you about. It needs to take into account your holistic financial picture. It needs to take into account how much money you have in your retirement fund savings, how much money you have in discretionary savings, how much you contribute towards any form of savings. It needs to look at your financial position. Do you have a house, do you pay money towards a bond, how much do you spend every month in living expenses, how much do you earn, how much are you projected to earn?
It effectively needs to first formulate and get a picture of you as an individual with financial needs before it starts looking at what investment strategy would suit your requirements, and what risk level you should be assuming in terms of that investment strategy.
SM: Okay. So a financial calculator wouldn’t necessarily do that?
MW: No. A financial calculator masquerading as a robo-advisor – because the robo-advisor is the hot name in town, and everyone is calling everything a robo-advisor – a financial calculator effectively does three things. It asks you about your risk profile, how much money do you need and when do you need it? And then based literally on the back of those three pieces of information it points you to some investment product or collection of investment products, usually quite expensive, and in theory just tells you how much you need to invest to achieve your investment objective over whatever period you told it you wanted to save over.
SM: So, if you should be able to have a legal claim then, how much should you be paying for the robo-advice?
MW: This is where it gets very interesting. With the calculators, typically, if you dig into the terms and conditions of a website which calls itself a robo-advisor, you will find whether this is true advice or this is nonsense – such as we are inviting you to do business, but this isn’t financial advice.
So for websites which do offer financial advice – we are talking about true robo-advisors now – internationally typical fees for those range anywhere from 0.2% to 0.5% per annum.
SMI: Okay, Alright, we’ll leave it there. Thanks to Magda Wierzycka.