How to tell the difference between a robo-advisor and a calculator

A small  number  of  websites  marketing  themselves  as “robo-advisors” have been launched in South Africa to date, but more are coming.

Having looked at “robo-advisors” available both locally and internationally, it is clear that some of these are true robo- advisors and others are just basic projection calculators with very fancy internet interfaces wrapped around them to create an impression of substance.

Hence the “robo-advice” is no advice at all, and if things go wrong you will have no one else to blame but yourself.

S**o how do you tell the difference?**

Let’s start by describing a financial calculator. It is normally a website which asks you very rudimentary questions, mostly to  establish your  name and  contact details. The calculator than asks you for three basic pieces of information: your risk profile, how much money you need and by when. Once you input the information it leads you to a page which, based on those three pieces of information, points you to an investment product and calculates how much you need to invest in that product over the period you stipulated to achieve your goal. The investment product is a direct match for the risk profile you have selected. Hence no advice has been provided whatsoever. The consequences of having selected the wrong risk profile, and hence the wrong product, are yours alone.

Instead of one product there may also be a limited choice of products matching the risk profile you have selected. This is an even greater dilution of accountability – you select both the risk profile and the investment product.

A robo-advisor, on the other hand, takes a lot more information into account in arriving at a recommended risk profile and an investment strategy. The risk profile of the investment strategy is determined for you, rather than by you. Robo-advisors which provide true advice gather a lot more personal information from you, provide you with a customized financial plan or a “record of advice”, a formal document compliant with the requirements of the FAIS Act, and offer to review that plan at least annually. The financial plan formally documents the investment strategy and the factors taken into account in arriving at that strategy. Most importantly the companies behind robo-advisors take responsibility for the advice that they have given you, rather than leaving you to face the consequences of poor decision- making alone.

Robo-advisors are designed to lower the cost of accessing savings products for the benefit of consumers. Beware of “robo-advisors” which charge commissions or financial advisory fees, even at a discounted rate. If you are willing to pay financial advisory fees you are better off hiring a professional financial planner who can look at your financial position from a holistic perspective and offer a more comprehensive solution than a robo-advisor ever will. You should always be able to negotiate an advisory fee based on the service you receive. No robo-advisor should ever charge a fee if only because you cannot negotiate with a robo-advisor. More importantly, charging advisory fees goes against the spirit and intentions of robo-advice.

Robo-advisors should guide investors to cost-effective investment solutions, such as index-tracking funds. There is a reason for that. The differences between active asset managers such as Coronation, Allan Gray and Investec are subtle in nature and inconsistent over time. Hence, unless one veers into the field of artificial intelligence, no quantitative model behind a robo- advisor can predict which manager will outperform in future with any degree of certainty. Consequently, it is impossible to provide “advice” as to manager selection using a robo-advisor. Here, human financial planners have an edge in being able to assess the investor’s preferences for asset managers and factor those into the advice being provided with less risk of being subsequently held liable.

If all else fails look carefully at the terms and conditions of the robo-advisor. Those masquerading themselves normally have to disclose that they are not, in fact, “offering financial advice”, and might be merely “inviting you to do business”.

Once  robo-advisors become more  common it  will  be  up to investors to educate themselves in order to tell the difference. Once again, do you research, play with a few to see the differences and make your decisions on an informed basis.  Here is a selection of international robo-advisors to give you an idea: www.nutmeg.com, www.wealthfront.com, www.betterment.com.

The great thing about all robo-advisors is that there is no pressure to “buy”. It is entirely your choice.

ADDITIONAL NOTES

**MAGDA WIERZYCKA

CEO, SYGNIA GROUP**

Magda qualified as a Fellow of the Faculty of Actuaries (Edinburgh) in 1994. She has over 20 years’ experience in the South African asset management industry and has published widely in the field. She has also served as a board member of the Actuarial Society of South Africa.

She started her career as a product development and investments actuary at Southern Life in 1993, where she designed and managed index-tracking funds, followed by two years at Alexander Forbes as an investment consultant. In 1997 she joined Coronation Fund Managers as Head of Institutional Business and a director. While at Coronation she was responsible for growing the institutional assets under management of the company fivefold. Magda left Coronation in 2003 to start IQvest, a fund of hedge funds company. Later that year, after selling IQvest to the African Harvest group, she was appointed to the position of CEO of African Harvest. Under her stewardship the assets under management of the company grew from R10 billion in 2003 to R35 billion in 2006. After negotiating the sale of African Harvest Fund Managers to Cadiz Financial Services in 2006, she led the management buy-out of the remainder of the African Harvest group which resulted in the formation of Sygnia. Since 2006 she has headed Sygnia as its CEO.

Sygnia Newsletter May 2016