Getting investment advice from a robot may sound far-fetched, but these days it’s a reality. It’s not quite R2D2 giving you stock tips, it’s more about using automation to create a customised investment portfolio just for you. This kind of automated advice is called robo-advice.
How could I use robo-advice?
Let’s say you want to start investing. You have some money but are not sure what to invest in or where to go to get investment advice. You don’t want to pay the cost of seeing a financial planner and you don’t feel confident enough to pick the stocks yourself. This is where robo-advice comes in, by providing low cost, online, automated investment advice.
Most robo-advisors work as follows:
- You go online and answer some questions about your investment goals (how much money are you investing? How long for?) and your risk preferences (how much money are you prepared to lose? Are you more concerned about maximising profits, or minimising losses?)
- Once you have answered the questions you will be provided with a list of suggested investments that suit your goals and risk preferences
- If you like the look of these investments, then you can open an account online, deposit the money and the robo-advisor will make the investments for you
- Once you’ve invested, you’ll have online access to monitor your portfolio and see how it’s performing
The robo-advice process should be seamless and easy, so that within 15 minutes you will have set-up your own investment portfolio.
What are the Pros and Cons?
OK, first let’s start with the good stuff:
- Robo-advice is low cost: If you were to invest with a traditional fund manager, you would expect to pay 1%-2% of the total amount you invest as a management fee. This may not sound like a lot, but if your portfolio is earning 4% a year, then paying half of that to a fund manager is a lot. Robo advisors tend to charge closer to 0.50% to 0.75%. The lower the fees, the larger the return to you.
- Easy: There are no appointments, no reams of paper work to fill out, instead you can set-up your investment portfolio online.
- Online Access: If you invest in a fund it can sometimes be difficult to get up to date performance information, with many funds reporting on a quarterly basis. With robo-advice you have any time online access to your portfolio and performance should be updated daily.
- Mix of Investments: If you invest yourself, you might own just a handful of stocks, meaning you have all your eggs in one basket. A good robo-advisor should provide you with a mix of investments, meaning you are investing in lots of stocks, lots of bonds, and some cash. This helps reduce the risk of your investments.
But robo-advisors aren’t perfect, here are some of the downsides:
- Limited Advice: Robo-advisors will tell you what your investments should be, but they won’t tell you if you should be paying off your mortgage before making any investments, or advising you to get life insurance now that you’re a parent. They are just focusing on investments.
- Low Barriers to Entry: Not all robo-advisors are created equal. Some advisors are run by people with IT backgrounds, rather than experienced investment managers. Make sure the people behind the robo-advice have at least 10 years of investment management experience.
- Index Tracking: Robo-advisors keep costs low by tracking an index rather than by trying to pick the best stocks. For example, this could mean buying the ASX100 index, giving you exposure to the 100 largest shares in the Australian stock market, rather than picking the stocks within those 100 that you think will perform best. Research has shown index tracking usually performs better than stock picking. However some commentators believe that that is only in a good market, and that in a falling market the opposite could be the case.
How to pick a robo-advisor
Robo-advice is an easy, low cost way to start an investment portfolio. As time goes on, you may need to see a financial advisor about more complicated matters (like insurance, or preparing for retirement), but until then robo-advice may be all you need.
There are a number of robo-advisors in the Australian market, how should you pick one?
- Expertise: As we highlighted above, not everyone providing investment advice online has a long history in investment management. If you are paying someone to manage your investments, make sure that they have at least 10 years of experience in doing exactly that. Just because the website looks great and is user friendly, doesn’t mean the investment advice is appropriate.
- Cost: The whole point of robo-advice is that it is a low cost, online service, so make sure it really is low cost and shop around the different providers. I wouldn’t necessarily go with the cheapest, but it is something you need to consider along with investment experience.
- Customer Service: There is nothing worse than having an online service that is only online, with no ability to call or email. Before you set-up it might be worth reaching out to the provider, either by phone or email, so see how responsive they are. You want someone who will answer the phone when there is a problem.
- Selling: What happens if you want your money back? Look into the process to make sure it fits within your time frame. For example, you don’t want to get into a situation where you need your investment money immediately, and then find that the selling process takes a few weeks.
Robo Advisors are a useful tool and a good way to get started in investing, but make sure you shop around and find the one that is best for you, remember it’s your hard earned money they’re investing.
The information in this article is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs and before acting on the advice.