Robo-advice is an online service that professionally invests your money for fees that are often significantly less than what banks or investment management firms charge.
When you sign up with a robo-adviser, you generally answer an online questionnaire about your willingness and ability to take on investment risks, and how long you plan to invest funds in the market and other personal information. The service will then typically invest your funds in low-cost exchange-traded funds (ETFs) based on your personal profile and risk tolerance.
Robo-advice is not for everyone, and there is no right/wrong model; that depends on what you want and if you are selecting based on cost, user experience, the people behind the service, feature choice, ability to self-select investments, industry/geographic tilts, etc.
The Royal Commission has surfaced serious problems in the investment management industry, mainly involving conflicts of interest, a lack of transparency and unnecessarily high fees. Robo-advice looks to address these problems, providing investment advice and ongoing management to people who previously were not able to receive such services at an affordable price point.
So, what are some key aspects of your robo-adviser you should consider?
Automated investment services rely on the asset management experience of the people behind the technology.
These are the individuals who are responsible for assessing and adjusting asset allocation parameters, evaluating portfolio performance and benchmarking, reviewing global market conditions and trends (especially as they relate to disruptive events) and evaluating the ETF product landscape to ensure the best product selection for investors.
The human overlay along with the digital access and automation is important to build trust for investors that the service provided is professionally managed and should help investors avoid common investing mistakes (most notably, emotionally driven or poorly informed decisions) by adding an experienced human overlay with the technical automation.
A year is a very short time for measuring investment performance, but it is understandably a figure of interest to potential investors.
It’s important to note strategies can vary and not all robo-advice services are the same. Longer-term returns will eventually illuminate the impact of the human asset management experience that complements the technology and automation of a robo-advice service.
Look for transparent returns that are published regularly, which should show performance broken down for different portfolios as well as different asset classes.
Minimising costs should be a focus of every investor’s strategy. The level of costs and fees incurred while investing can have a dramatic impact on overall portfolio returns, particularly over the longer term. This is because the lower the costs, the greater the proportion of an investment’s return which can flow to the investor and the larger the potential for that money to be reinvested and compound into the future.
Put simply, every dollar saved in trading commissions and management fees is an extra dollar available for investment and earnings potential. Over time, even small differences in fees and costs can add significant additional returns.
Some robo-advisers will pool your investment together with other clients, while others keep individual investments separate, giving each client their own Holder Identification Number (HIN).
It is worth determining which investment model the robo-adviser uses.
Quality of engagement
Managing someone’s investment is a privilege, and trust and responsiveness are essential elements to any financial relationship.
If you’re trusting someone with your investment, they should be responsive with calls and/or emails. Is the robo-adviser based in Australia and responsive with communication?
Robo-advice services now manage hundreds of billions of funds overseas, and have become popular for both younger, early savers, as well as high new worth, sophisticated investors seeking a better way to utilise the combination of automation/technology with the support of human asset management expertise.
As you make a decision on which robo-adviser is right for you, consider the factors above, as your decision may make a significant difference over time.
Patrick (Pat) Garrett is the CEO at Six Park