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Science-fiction writers have long been predicting that robots will take over the world, and those predictions could soon come true in the lucrative investment advice market.
Recent years have seen the emergence of digital financial advisers – known as robo advisers – which take advantage of modern technology to offer low-cost investment management services. Only 20% of Australians get advice. If cost is the reason the majority of Aussies don't get financial advice, then robo advice might be the answer. In this guide we explain how these robo advisers work and how can you compare the services offered by different providers.
Robo advisers you can compare today
Robo advisers in Australia
Alternative investment classes
What is a robo adviser?
A robo adviser performs many of the same services as a traditional financial adviser. Using complex algorithms and technology, these digital advisers provide financial plans to consumers and automatically manage their investments. The basic operation of these automated financial advice services is quite simple.
Once you provide details of your investment goals, investment timeframe and appetite for risk, the robo advice service generates a recommended investment portfolio, which is usually based on exchange traded funds (ETFs). Once you’ve invested your money, the robo adviser manages your portfolio and re-balances it whenever necessary to ensure it remains in line with your risk tolerance levels.
Proponents of robo advisers say that instead of being influenced by emotion when making trades, digital advisers use algorithms and mathematical models to determine the right asset allocations for investors. They’re also much cheaper than having a traditional financial adviser actively manage your investments, with robo advice available for as little as one-tenth of the cost of receiving advice the old-fashioned way.
Digital advice services are based more on building and maintaining a portfolio than providing strategic advice, so most analysts predict that there will still be a place for traditional financial advisers in the future – in fact, the advantages the technology presents could be very useful tools for financial advisers. However, for the 80% of the population who either cannot afford or are unwilling to pay the fees to receive traditional financial advice, robo advisers offer a convenient and affordable alternative.
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The rise of robo advice
The robo advice revolution started in the US a few years ago, and since then companies such as Betterment, FutureAdvisor and Wealthfront have enjoyed enormous success. Both Betterment and Wealthfront each manage more than $2.6 billion of customer assets, with the market expected to continue to rapidly expand in coming years.
In fact, research by KPMG has predicted that by the year 2020, robo advisers will manage around USD$2.2 trillion worth of assets. In Australia, the robo advice sector is still in its infancy. We’ve profiled and compared the established players below, with several more providers expected to launch their own robo advice services in the next 12 months.
In addition to the online robo advice services listed above, it’s also worth pointing out that there are some robo advice services that are only available through a financial adviser. One such service is Guru, which was launched in June 2015 by Yellow Brick Road Wealth Management. The initial Guru session is free and takes place with a Yellow Brick Road Money Coach, allowing you to assess your financial goals and what you need to do to achieve them.
Access to the robo financial management tool and a Yellow Brick Road adviser is then provided for an ongoing fee. The big banks are also moving into the robo advice sector. NAB rolled out its Prosper service to 40,000 customers in September 2015. Available through Internet banking, Prosper asks customers questions about their current financial situation and future goals before providing tailored advice and assessment. Initially designed to provide personalised advice on super and insurance, Prosper is scheduled to expand into debt, cash flow, investments and estate planning in the future.
How do I sign up to a robo advice service?
Although the exact signup process differs between robo advisers, you will generally need to follow these steps:
- Provide your name, contact details and proof of identity.
- Complete a questionnaire regarding your investment timeframe and your tolerance for withstanding market fluctuations.
- The robo adviser generates a recommended investment portfolio. This is often accompanied by a Statement of Advice, which is required by Australian law if you are being given personal advice.
- If you’re happy with the investment portfolio, you can opt to proceed with the recommended strategy.
- Provide your bank account details to fund the investment.
- The robo adviser invests your money in the chosen portfolio.
- The robo adviser monitors your portfolio and makes adjustments when necessary to make sure it satisfies your tolerance for risk.
Robo advice is changing the face of wealth management around the world and could offer a more affordable way for you to look after your investments. However, make sure you compare the benefits and features of a number of robo advisers before choosing the right service for you.