Financial advice usually requires a demonstration of the adviser’s trustworthiness, experience and track record. But it may no longer be enough.
The emergence of algorithms that automatically calculate the best course of action for an investment or insurance plan threatens to unseat humans, who lack the evidence of hard data.
Robo-advisers are a category of websites that use algorithms to automate online investment decisions for far less than a human consultation. Robo-adviser sites already have US$14 billion under management, according to Swiss research agency MyPrivateBanking Research. This already sizeable asset pool is forecast to grow to US$255 billion within five years, reports the Financial Times.
Automated advisory sites such as Betterment and Wealthfront in the US or Nutmeg in the UK target the lower end of the investor market.
They charge below 1 per cent with a low minimum portfolio value. (Betterment charges US$13 a month, plus 0.15 per cent annually.)
The rise in robo-advisers is due to several converging trends. The global financial crisis and a string of financial planning scandals in Australia and elsewhere have eroded the public’s trust in financial advisers.
‘Active’ investing may be too difficult to do well. “An active manager will charge a higher management fee and try to beat the market through stock selection,” says Andrew Bird, CEO of Sharesight, a portfolio admin and tax reporting tool. “Lots of research shows that most managers don’t succeed.”
The most recent revelations of NAB and Commonwealth Bank employees short-changing clients to gain commissions have also reinforced concerns over independence. A report released by Roy Morgan in late May 2015 showed that 75 per cent of investment products recommended by Australia’s four main banks and AMP were from an aligned funds management group.
Local robo-expertise
Australia has only one bona fide robo-adviser site – Stockspot. Founder and CEO Chris Brycki says that although Australia is a few years behind the US, the high cost of advice and the cost of investing – not to mention the attraction of unconflicted advice – will drive younger investors towards algorithm-based services.
“In the future, there will be more separation between those providing advice and investments,” says Brycki. “We don’t manufacture the products or receive any payments [in commission]. That allows us to pick and choose the best ones.”
