So you are already ahead of most of the population when it comes to your finances.Firstly you realise that to invest is the only reliable way of being financially secure (seriously).
Secondly you know that reducing the cost of investing is a big part of getting your investment strategy right.
So you decide to become a DIY investor and spend evenings and weekends after your day job watching the markets, learning portfolio construction techniques, becoming an expert in stock and asset class valuation and finding the cheapest instruments to execute your strategies.
At parties you cannot wait for the conversation to turn to money so you can show everyone how big your portfolio is. And then you stop being invited to parties altogether.
It’s good to have control of your investments, but it takes lots of time and effort to create investment solutions that find the right balance between, return, diversification and cost efficiency.
Even DIY investing can cost you as much as – if not more than – a traditional actively managed unit trust if you trade shares in small amounts and trade a lot or if you cannot access institutional share classes for collective investment schemes, or your administration costs are too high.
However, there is a third way emerging which might offer a better alternative between either doing it yourself or handing your entire investment over to a financial advisor.
Like most other industries, technology is changing the way that we do things, and investment is no different. New investment businesses are being launched that are building systems that support investment decision-making. The result is the ability to build and control a professional grade investment plan without having to know everything about investment.
This new blend between investment and technology is known in the industry as a “Robo-Advisor”, a term which those building Robo-Advisors loathe and detest but is far more consumer-friendly than Automated Investment Advice and Administration Platforms.
It’s worth mentioning in this article, and I say this with unfortunate personal experience, that those building Robo-Advisors are almost never invited to parties. They are even worse than DIY investors because they tend to talk in statistics and mention the word “algorithm” a lot.
These new Robo-Advisors embed the investment knowledge contained in the head of your typical investment professional into an online algorithm (or system) in such a way that anyone can use it.
If you think about it, most of the things that we use in our everyday life are like that. Your car is a machine, a system that allows you to go almost wherever you like without you having to be a mechanical engineer.
Press the accelerator pedal, turn the steering wheel and look through the windscreen to get where you want to go – all the car’s systems work together to make it easy for you to use and to help you cover great distances safely and quickly.
Good Robo-Advisors typically blend efficient, low cost passive investment strategies and high quality digital advice algorithms to deliver a balanced risk and return profile from the capital markets (the share and debt markets) to help consumers achieve their investment goals.
These algorithms are incredibly difficult to build well and the design and maintenance is regulated by the Financial Services Board. This should help ensure that as this industry emerges only good quality Robo-Advisors are available to everyone.
The best digital advice algorithms are designed to work exclusively with pre-selected investment strategies, but the investment fund is only part of the solution.
This isn’t about outperforming benchmarks, or returns relative to a benchmark, it is about creating suitable outcomes for consumers using the most efficient and cost effective investment exposures in the market, which at this stage are typically rules based strategies.
It is an evidence-based approach to investment that uses statistics, investment and financial planning knowledge to create investment solutions at extremely low cost.
Creating a tailored investment plan during signup is only part of the solution. The vast majority of advice and decision support is needed once a person has an investment and this is where great Robo-Advisors use qualified, unconflicted human advisors who are not paid on a commission basis to deliver objective advice.
So, to cut to the chase, Robo-Advisors should be much cheaper than the traditional face-to-face engagement with a financial advisor.
The costs however do vary and I have seen costs from around 0.7% to 1.5% all in (this should include the cost of the investment product, the cost of ongoing advice and administration). Robo-Advisors typically do not charge upfront advice fees and with the good Robo-Advisors the fees you pay should reduce the more you invest with them.
If you compare this to a typical engagement with a financial advisor, which is around 2.5% all in, then you could save from between 40% to 80% of the fees you would be paying with a traditional advisor.
If you are looking for a Robo-Advisor, before you decide to put all your money with them, make sure they actually give advice, both upfront and ongoing advice, and it must be included in the costs. Also, you must see all of the costs upfront – and your outcomes should be shown net of all fees. Otherwise it is just a pretty website.