The most significant development in the financial services industry in the US and the UK in recent times has been the emergence of robo-advisors – internet-based systems which, through a series of questions, lead investors to an appropriate mix of investments suited to their personal circumstances.
The most significant development in the financial services industry in the US and the UK in recent times has been the emergence of robo-advisors – internet-based systems which, through a series of questions, lead investors to an appropriate mix of investments suited to their personal circumstances.
The implementation is facilitated by instant access to application forms and easy-to-follow investment processes. Most investment strategies are based on low-cost passive, or index-tracking funds. Most robo-advisors offer access to a call centre, if required, but the help provided is limited in nature.
Robo-advisors have been described as the Uber of the financial services industry and have been gaining steady ground internationally.
The benefits of robo-advisors are obvious:
The concept of ‘pressure sales’ is eliminated. In the world of robo-advisors investment products are ‘bought’ rather than ‘sold’ – the age-old premise which underpins the marketing strategies of most financial services institutions.
There is no urgency to make a decision. You can take your time, play with the input parameters and make your own decisions without the need to conform to someone else’s timetable or ‘sales’ targets.
You know exactly what you are paying, and once again, can make that choice actively without any embarrassment about the ‘affordability’ of the service.
The investment choices, albeit customised to your personal circumstances through a custom-designed asset allocation strategy, are simple to understand and quick to implement. There is no need to worry about which asset managers to choose, or which products to invest in. There is also no need to worry about underperformance of the market, value or growth investment styles, incomprehensible fee structures and all the colourful jargon which makes the field of investments such a complex and scary proposition.
In an index-tracking robo-advisor model, the unnecessary tiers of costs are stripped out. There are no financial advisory fees as, effectively, the robo-advisor provides the advice for free. Active asset management fees and performance fees are also out. Investors are able to implement their desired investment strategy quickly and cost effectively. This means, conservatively, a 2% per annum saving in costs. Does such a saving in costs matter? A 2% annual saving translates into a benefit of almost 20% higher over ten years and more than 40% higher over 20 years.
The robo-advisor provides the investor with a low-level financial plan which suits the requirements of many investors, particularly first-time investors and young savers who do not need life insurance, disability or estate planning advice.
The robo-advisor provides investors with consistent advice, taking into account their personal circumstances and risk profiles, without any subjectivity.
One of the most value-destroying behaviours of many investors is switching between asset managers as they chase top performance. An investment in a customised risk-profiled investment strategy based on index-tracking funds eliminates the risk of these costly decision-making errors as the investor is more likely to stick to one consistent strategy.
Clearly the hot issue when talking about robo-advisors is the question of whether robo-advisors will eliminate the need for professional financial advice.
In reality, at least for now, robo-advisors are not the complete answer. They are unlikely to provide the personal touch or reassurance that human contact can provide. Not all investors will trust a computer ahead of a person with whom they have a trusted relationship. They are also unlikely to solve complex estate planning or tax issues.
Robo-advisors operate well in the field of investments, rather than life insurance. They are limited in terms of how much explanation of different aspects of investments they can provide. They are also unable to offer the extent of advice required when an individual has left saving too late and needs to scramble to secure their financial future. They require a level of tech-savviness which many older investors do not have. In all such circumstances the value of good financial planning advice cannot be underestimated.
However, for most people who simply want to put away some money in an easy, cost-effective and convenient way, with little risk of underperformance of the market, a robo-advisor is the perfect answer.
Sygnia’s robo-advisor is to be launched on May 1 2016.