Could robo advice be the future of self-managed super funds?
Robo advisers are changing the way many Australians receive investment advice.
The traditional method of a face-to-face consultation with a financial adviser is no longer the only way that Australians can access expert advice on how to manage their money. The past few years have seen the emergence of a number of digital financial advice services, known as robo advisers, that use complex algorithms to provide tailored investment strategies.
While initially available only for share trading, robo advice is rapidly becoming available across an increasing range of investment options, including SMSFs. Superstash is one of the first in the robo advice space to look after SMSFs, providing a dedicated SMSF app and a choice of investment strategies designed to suit your financial needs.
finder.com.au spoke to Kris Kitto, director at Superstash, to find out how robo advice is shaking up the SMSF sector.
What is an SMSF?
SMSFs allow investors to have complete control over how their retirement savings are managed. As the members of an SMSF are its trustees, they can take charge of where and how their superannuation balance is invested. However, SMSFs are only suitable for experienced traders who understand the risks of investing, and who have a large super balance to invest.
“There is over $2 trillion invested across all superannuation funds and close to 600,000 SMSFs control 29%, or just under $600 billion of that $2 trillion,” Kitto explains.
“More than 1 million Australians are members of SMSFs and it is gaining in popularity as people are taking control of their wealth creation. Superannuation is a major part of an individual’s wealth. SMSFs provide unparalleled control and transparency and there is no conflict of interest – individuals choose what the best investments are for them and can see all the underlying shares they legally own via their SMSF.”
You can find more details about exactly what a SMSF is in our Self-managed super fund guide.
What is robo advice?
Robo advisers offer a low-cost alternative for Australians looking for financial advice. This is typically provided through a combination of complex algorithms and digital technology. The process of using a robo adviser is simple:
- After signing up for an account, you provide some details about your financial situation and tolerance for risk.
- The robo adviser will present you with a recommended investment strategy from its selection of model portfolios.
- You select the portfolio you want and sit back and relax while the robo adviser invests your money. You will also receive regular updates and rebalancing of your portfolio so it continues to meet your investment needs.
Our guide to digital financial advisers explains the robo advice process in more detail.
Combining robo advice and SMSFs
From Australian and international shares to managed funds, property and income, robo advisers can help ordinary investors manage their finances across a wide range of asset classes. Robo advice is currently also in the process of transforming the way some Australians control their SMSF investments.
Figures from the Australian Prudential Regulation Authority (APRA) reveal that the number of SMSFs in Australia grew by 5% in the year to March 2015 as more Australians look to take control of their retirement savings. This growth in the popularity of SMSFs looks set to make this sector a prime target for robo advisers, as investors look for ways to reduce the cost of managing an SMSF. Expect to see more providers joining Superstash in offering tailored SMSF investment and management advice in the coming years.
“Building Superstash was definitely a challenge – but an enjoyable one,” Kitto says. “We have the advantage of being intimate with self-managed super funds, and we had a very clear objective in terms of what we wanted to build for our users. A key item for any project like this is the user experience, which is something that continuously needs to be refined. With Superstash, we have been able to simplify the complex beast that superannuation is.”
Benefits of robo advice for the SMSF sector
On the surface, it might seem a little bizarre that SMSF investors, those people who want to manage their own investments, will be relying on advice from a robot to help them make the right financial decisions. However, robo advice does have many potential benefits for Australian SMSFs.
For example, robo advisers allow SMSF trustees to access tailored financial advice at a fraction of the cost of consulting with an investment expert. Using a robo adviser makes it possible for self-directed investors who want to retain some control to do so – they can use robo advice for one portion of their investment capital and make their own decisions on how to spend the other portion – and also allows trustees to substantially reduce the fund’s management expenses.
Then, of course, there’s the major benefit of robo advisers: solid long-term results. Rather than taking unnecessary risks or making decisions based on emotion, robo advisers use mathematics to determine their investment approach.
“So far we’ve seen users take an active interest in their Superstash portfolios, however they are very passive when it comes to switching between portfolios,” Kitto says. “This demonstrates that the smarts we’ve built in when it comes to the portfolio recommendations are robust and accurate, which was shown in our testing and is now being seen in the real-world environment.”
Superstash can also help its users ensure that their SMSF is fully compliant. “Superstash has been aptly described as an ‘SMSF with training wheels’,” Kitto explains.
“The Superstash solution is what I call ‘tight’ – the accounts and portfolios used create a closed loop so there is very little chance of mischief. Users will find it practically impossible to illegally access any of their super using Superstash. The ongoing SMSF compliance is monitored by our experienced accounting team and Superstash also uses one of the largest specialist SMSF auditors in the country. Superstash users and the ATO, as the regulator of SMSFs, can have confidence that their SMSFs will maintain compliant status.”
What does the future hold?
Thanks to its potential to reduce the cost of running an SMSF and receiving financial advice, not to mention the large scale of the SMSF industry in Australia, SMSF-related robo advice is expected to be a big growth sector in the coming 12 months.
However, robo advice is certainly not for every SMSF. People who genuinely want to take full control of their investments will obviously avoid robo advisers and make their own financial decisions. It’s also worth pointing out that while some services such as Superstash include features to help you manage the tax and administrative matters for your SMSF, not all robo advisers provide the same level of assistance.
Some have also raised concerns that the mooted development of robo advice services by major banks could result in some institutions manipulating robo advice technology to their own advantage.
Exactly what the future holds for SMSFs and robo advice remains to be seen. Until then, robo advisers have the potential to provide a long list of benefits to savvy investors who know how to get the most out of the technology at their disposal.