Finance Dollars & Sense Why robo-advice can be a good low-cost investment option

Why robo-advice can be a good low-cost investment option

robo-advice man mobile phone financial planning
Robo-advice could be a good option for novice investors with limited budgets. Photo: Getty
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Want to start investing but don’t know where to start?

Robo-advice could be just the thing for you.

It’s a low-cost way to invest relatively small amounts of money while still accessing affordable guidance from experts.

Here’s how it works. You register with a robo-adviser, fill in some forms, and then receive some recommendations about where to invest.

That’s the long and short of it. But, of course, there’s a bit more to it than that.

The algorithms employed by robo-advisers will “assess you through your answers to questions on risk capacity and appetite and come up with a recommendation based on your actual feedback,” said Pat Garrett, CEO of robo-advisery Six Park.

Rainmaker’s measure of the Australian robo-advice market.

The questions will elicit information on your personal and financial situation, your objectives, how long you plan to stay in the market, and how much experience you have.

Some companies, Stockspot, will offer additional human advice if you feel you need it.

“It’s all part of the service,” said Chris Brycki, founder and CEO of Stockspot.

“We find that once people are into their 50s and 60s, they have more complex situations and would like to have a call [to a human].”

The reason robo-advisers can deal with people’s needs in a complex world is because they rely on exchange-traded funds (ETFs) to invest on behalf of their clients.

They use ETFs to develop a cocktail of investments to suit your risk appetite.

According to Rainmaker, the average operator has seven investment options, with some offering as many as 13.

What’s on the table

The ETFs typically cover a range of investment options.

Some will focus on local or international shares, others on fixed interest or cash, and others still on listed infrastructure and emerging markets.

All options provide access to a wider and cheaper range of investments than you would pay if investing by yourself.

Once the robo-advisory has processed your information, it will send you a recommended investment option and you can choose to go ahead and deposit your money into an account they establish.

From there, the money is split between the ETFs your robo-adviser has selected for you.

You might ask at this point: “Why would I choose a robo-adviser over a human who can develop a better understanding of my needs and wants?”

Well, because it’s cheaper.

“To justify the time an adviser would put in to give you holistic advice on your overall financial position, you really need to have a six-figure sum to invest,” Paramount Financial Solutions principal Wayne Leggett said.

Some planners won’t even see people with less that $500,000 at their disposal.

That’s because their initial review and piece of advice could cost you between $1000 and $5000 and there would be more for yearly reviews.

Both Stockspot and Six Park accept investors with as little as $2000 to invest and there are others that will take even less.

It’s worth noting that human advisers take issue with the word ‘robo-advice’, though.

“It’s not advice, it’s information,” Mr Leggett said.

“Just telling people what their options are. The next step, making recommendations, is the difficult part.”

Be that as it may, a rising number of people are willing to use the model and Rainmaker director Alex Dunnin says the sector would have “a few hundred million dollars” invested at the moment.

Once you make your investment choice, your robo-adviser will continue to serve you.

All groups provide a yearly update on your investments and most will automatically rebalance your portfolio if your cash account builds up through dividends or further contributions.

“We will do periodic rebalances over a quarterly cycle, and once a year we come back to you and effectively redo the investment assessment to make sure that it’s still a suitable strategy,” Mr Garrett said.

Robo costs

Typically, charges for robo-advice are based on your investment size.

For balances of up to $20,000, robo-advice companies charge between $5.50 and $7 a month.

For balances above that, charges are likely to be between 0.5 per cent and 0.7 per cent annually, with lesser charges for much larger balances.

“This implies robo-advisers cost only about half that of regular financial advisers,” Rainmaker found.

Superannuation funds typically charge similar fees before adding on the extra costs of running a fund, Mr Dunnin said.

As for performance, ETFs typically make similar returns to the markets to which they are tied.

“We’ve typically outperformed more than 80 per cent of comparable multi-asset class managed funds over five years,” Mr Garrett said.

Those returns are driven by low costs and the choice of ETFs on offer to clients.

“The whole process is automated and the underlying investment portfolios are built by people, not robots,” Mr Brycki said.

The US has the world’s most advanced robo-adviser market with an estimated $825 billion overseen by 21 robo-advisers covering 14 million clients.

Given that, the Australian market has the potential to grow to $60 billion, Rainmaker found.