Is robo-advice the future of financial planning in Australia?
The future of financial planning may feel uncertain at the moment, off the back of a raft of significant reforms and large numbers of financial advisers leaving the industry. Some speculate the future is digital, in the form of robo-advice. With even large international corporations, such as Goldman Sachs or Vanguard, incorporating such offers, robo-advice could have an attractive future.
We spoke to Pat Garrett, co-CEO and co-founder of Six Park Asset Management, an Australian online investment management services firm founded in 2014.
What is robo-advice?
In basic terms, robo-advice is automated online investment management.
Mr Garrett says, “it is taking a number of these activities and interactions that a person might normally have face to face with an advisor on the investment management side and takes the components that can be automated, which include things like a risk assessment, and a fact find.”
He views robo-advice as changing the traditional landscape of financial advice, which typically catered more to high-net worth individuals, by making access to advice more affordable.
“You can streamline the efficiency of delivering an investment management service and therefore, construct a well-diversified portfolio primarily using index funds, at a very affordable price point relative to what people might normally buy, or simply not have access to”.
Robo-advice typically uses passive investments, particularly ETFs, to construct portfolios. The reason for this comes down to their simplicity to use and ease of access to different markets, along with the low costs involved in many ETFs. ETFs and index funds can also be easily implemented within modern portfolio theory and core-satellite portfolio investing.
Mr Garrett says, “picking individual stocks at any time in the market is very hard. And most experts get it wrong, let alone retail investors. So, our investment philosophy is that the two most important decisions that any investor can make is to be well-diversified and to keep your costs low. And what index funds do is basically help you accomplish both of those very efficiently because they are listed on the ASX. They track an index that typically has hundreds, if not thousands, of components either across a region, an industry, or an asset class, which can be defensive or growth. And because they are tracking an index, as opposed to actively trying to get in and out of the market, the fees are quite low. So, they are incredibly efficient investment vehicles to build diversified portfolios.”
Wide appeal for investors
Robo-advice appeals to a range of investors for a variety of reasons, though Mr Garrett says it tends to attract investors between 30-50 years old.
“It is sort of a midlife saver accumulating, they have a fairly medium to long-term investment horizon, and they don't need sophisticated financial advice that comes with a commensurate price tag,” he says.
Some investors even use robo-advice as a form of risk management.
“We have a number of clients who will use our service and then do some stock picking or buying a racehorse or whatever it is, bitcoin, around a service like ours. And so, it's a form of risk management, using a robo-like service, and then maybe doing active, more speculative investing around it,” says Mr Garrett.
He notes that Six Park Asset Management has seen an influx of smaller value accounts recently, as a result of market activity. Mr Garrett has also seen significant interest from investors wanting to set up accounts for children and grandchildren, without the need for complex financial advice.
Complementary rather than competition to traditional financial advice
That’s not to say that robo-advice will replace traditional forms of face-to-face financial advice. Mr Garrett sees them as complementary and filling existing gaps in the market for low-cost, low touch investment needs.
“Wealth managers and planners really need to modify their service delivery model a little bit to incorporate digital offerings, like robo-advice, so that they can address these types of needs in the market,”
He points to the US as a model for how robo-advice has become an integrated financial service tool.
“You're seeing the biggest banks, wealth managers, fund managers introduce digital, low cost, low touch offerings into their suite of services, either directly or through partnering with the likes of a robo-service. I think that that will happen in Australia… I think you'll see robo-advice services working with incumbents who already have the relationships with the mass market. And so, I just think you'll find it as an extension of the service spectrum, to be integrated within the wealth management industry. Like it has in America,” he says.
Just as technology is playing a massive role in the emergence of robo-advice, it can also be said that the ETF landscape has been crucial to its growth and future success. As the ETF landscape continues to evolve and tailor, it is likely that robo-advice will also evolve with it.
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