How Six Park is working to increase transparency in Australia’s financial advice industry
Robo advisers provide transparency in the financial advice industry, but will the uptake of robo advice mean the end of human financial advisers?
In the past couple of years, robo advisers have taken Australia’s financial advice industry by storm. By offering low-cost, easily accessible investment advice, these robo services provide a competitive alternative to human financial advisers.
But does the rise of the computer algorithm-based advice mean face-to-face meetings with your financial adviser will soon become a thing of the past? To find out, finder.com.au spoke to Patrick Garrett, founder and CEO of digital investment advice service Six Park.
A problem that needed fixing
The creation of any new product or service is prompted by a gap in the market. In Australia’s financial planning industry, that gap existed due to the simple fact that the existing financial advice setup wasn’t meeting the needs of many Australian investors.
As Garrett explains, Six Park was established because there was a “gaping need” for it in the market. “There were a lot of clear examples of abuses in the market, and [also] the fact that it was very expensive and hard to access good financial investment management advice. Myself and a co-founder, who have 25 years of experience in the financial industry and funds management industry, felt like all investors should have an opportunity to get professionalised investment advice that's easy to understand and affordable.”
However, in Australia, the reality was that the existing system did not provide that service well at all. In fact, it was expensive, confusing and wasn’t geared towards the consumer or the investor but towards the big financial institutions.
Outside of Australia, there were emerging business models that showed that you could use technology and exchange traded funds, the index funds, to build a sophisticated but fairly simple – for the user – investment management tool. They call it democratisation of investment management,” Garrett explains.
At times, there can also be a worrying lack of transparency about the investment advice on offer and how your money is being spent. With a large proportion of Australians completely unaware of risk profiles, asset allocations and how advisers work, there is plenty of scope for unscrupulous financial advisers to swindle unsuspecting customers.
Take the example of an Average Joe who stumbles across $100,000. He wants to manage it wisely but has no investment experience, so he seeks out a financial adviser, who crunches a few numbers and suggests that Joe invest in 10 different funds.
“What people didn't really realise is that about 80% of the advisers are owned by banks,” Garrett explains. “The banks were the ones creating those funds and the advisers were getting commissions to put people's money into those funds. And people didn't know that. Banks and advisors took advantage of a lot of people because, of course, if you didn't know better, you trusted the person that they were looking after your best interest – but they weren't.”
Will robo advisers increase transparency?
This lack of transparency in the financial advice sector was one of the problems that robo advisers sought to address. Where traditional financial advice is seen as complex and confusing, robo advisers aim to simplify the process and make investment management more accessible.
This gives consumers the freedom to check on the progress of their account and the investments they hold whenever they want. It should also increase the level of transparency in terms of fees charged – while hidden and unexpected fees are a common gripe with traditional financial advisers, many robo services clearly state all fees that apply to your account up-front.
Garrett explains that transparency is one of the key factors driving Six Park’s robo advice service. “At any point 24/7 you can pull up your portfolio on your phone and see exactly what you hold and the value of it,” he says.
The company also has a three-person advisory board (which includes a former Australian finance minister) that oversees all its investment decisions. “When people read about the advisory board and the experience of the people behind the automation, it seems to tick the trust box well, which is one of the issues in the market, and the fact that we would put a lot of energy and effort into trying to build a pretty transparent and compliant offering,” he says.
Although Six Park, founded in 2014, is still in its infancy, Garrett says the uptake so far has been impressive. “I think the overall uptake of robo advice in Australia is still in its early days relative to, say, in the US, as people get used to trusting what looks like a highly automated platform to hand their money over to. But it's growing, and it should.”
Other benefits of robo advisers
Robo advisers bring several other benefits to the financial advice industry, but at the top of the list is affordability. Traditionally, accessing a financial adviser was seen as the domain of the wealthy, or at least the ‘very comfortable’. But Six Park has a minimum account size right now of $10,000 – this amount is even lower at some other robo advisers – and Garrett expects that this figure will drop further in the near future.
You need a few thousand dollars and you can get one of these accounts set up and basically get a diversified portfolio of index exchange traded funds that are automatically rebalanced and reviewed by humans on a periodic basis, with a very, very strong advisory board that overlooks the asset allocation assumptions behind the different portfolios,” he says.
Robo advice services also charge lower fees than traditional financial advisers. Fees start at $11 a month for a Six Park account between $10,000 and $25,000. This changes to 0.5% for balances above the $25,000 mark and tiers down to 0.35%.
Compare that to the old world of financial advice, when it wasn’t uncommon for some investors to pay between 3% and 4.5% in fees to their adviser each year. “If the stock market or the investment portfolio went up 7% or 8% in a given year, which is a pretty decent year, they're giving half away in fees. If you're investing over 20 or 30 years, that's pure insanity,” Garrett says.
Robots vs humans
Given the many benefits that robo advice services offer to investors, could this mean the end of traditional, human financial advisers? Throughout the 20th century and into the 21st, debate has raged about the effect of robots taking over human jobs across a wide range of industries, not just finance. So as robo advisers continue to offer low-cost, transparent financial advice as they battle for market share, could receiving face-to-face financial advice become a thing of the past?
“I firmly believe that it's not a case of robo versus human. Ultimately, it's a combination of the two,” Garrett says.
Robo advice services, he explains, can’t provide tax advice to people, or help them with estate planning. “That's not what we do. We give what's called scaled advice. It's personal advice but it's scaled advice that is specific for the investment funds that you give to us. We make it very clear that our advice is limited in scope to those funds,” he says.
“But there's a time and a place for anyone, particularly as you get older in life, to sit down and actually get tax and insurance and estate planning advice from a human adviser.”Back to top
Robots and humans working together
In fact, rather than robots and humans being two completely separate parts of the financial advice sector, it looks likely that the two sides will join forces. As robo advisers and human advisers meet different needs of their customers, future years could see an increase in financial planning firms that still offer traditional face-to-face advice but also include a digital component in their services.
“We're actually in conversations with a couple of financial planner dealer groups because the smart financial planners out there are realising that they need to have a digital capability,” Garrett says. “They know that they need to be able to have a low-cost, low-touch offering for the target market out there that doesn't need the face-to-face, more expensive, more complicated financial advice products. Because, ultimately, the younger or the less complicated client will end up being the larger, more complicated client that's going to push the proverbial button that says, ‘I want to pay more to sit down with the planner now’.”
So rather than it being an argument of which is better, the robot or the human, the financial advice discussion in the future will centre on the partnership between the two.
In fact, Garrett says that investors should consider the people behind a robo advice service when comparing digital financial advisers. “Ultimately it's the people and the experience behind that front-end technology which, I would say, particularly in the early days of the industry, should be one of the critical decision points for somebody as they think about giving it a go,” he explains.
It remains to be seen exactly how robots and humans will work together and how the digital automation that robo-advisers provide fits into the spheres of wealth management and investment management that are driven by the human financial adviser.
Whichever course the future of financial advice takes, it seems clear that robo advice and human advisers are here to stay. “They'll join as opposed to fight each other,” Garrett says.
Patrick Garrett is the Founder and Chief Executive Officer at Six Park.
Image: Olya Tutova