In 2013 we started Stockspot to help more Australians access expert investment advice. Since launching, our investment strategies have outperformed the broad Australian share market with relatively lower risk – proving that technology can help people invest smarter.
Millions of Australians have visited our website which means that more and more people are discovering how they can invest without high-costs, complexity or conflicts of interest.
In parallel, automated investing platforms continue to gain traction around the world. Not only are these services demystifying investing and making it accessible, they’re also helping experienced investors.
Globally, robo-investing is the fastest growing area of wealth management, with studies showing it will grow to $16 trillion of assets under management by 2025.
In recent times, there have been new robo-advice services and automated investment platforms launched in Australia, as well as trading apps, such as Stake, Superhero, and Selfwealth.
The increasing choice means that consumers need to carefully consider what the right option is for them, as well as weigh up the costs and risks of each service.
Here are six important considerations if you want to find out what’s the best investment app or best robo advisor for you.
1. What are the total costs?
Low fees are one of their most important factors for selecting an any investment service. The great thing about automated investing is that it can be less than half the cost of seeing a traditional adviser and investing in active funds.
Many investment apps and online investment options market themselves as having low or no fees but there are a list of other costs that are hidden away in the small print. For instance:
- Some charge separately for brokerage – this incentivises them to ‘overtrade’ to make commissions
- Some charge for advice but make you implement, monitor and manage your portfolio on your own.
- Some ‘double up’ on transaction costs with a bid-ask spread (the best buy price compared to best sell price) on the underlying ETFs plus another bid-ask spread on their own fund that contains the ETFs.
- Some charge ‘dishonour fees’ and ‘document fees’ of up to $25 each.
- Some deduct ‘responsible entity recovery fees’, ‘netting fees’ and ‘transaction costs’ from your account based on a formula that they don’t even disclose.
These extra costs can mean that you may end up paying a whole lot more in the end.
Hidden fees can greatly inflate the costs you actually end up paying and have a significant impact on your net returns. It’s therefore crucial to pay close attention to fees before you invest, even when services advertise having low fees.
You should be able to find information on fees in any financial product’s Financial Services Guide (FSG) or Product Disclosure Statement (PDS).
Important questions for your robo-adviser: fees
- Are there any additional fees that I should be aware of?
- Are any fees open-ended or at the discretion of the service provider?
- What cost could I be paying in total once all fees are included?
- Do I need to pay brokerage separately?
- What about transaction costs?
- Netting fees?
- Implementation costs?
Stockspot’s fees management fee covers our entire investment service, such as portfolio management, all brokerage on buying and rebalancing, administration fees, detailed tax reporting and an annual audit.
Find out more on our Pricing page.
2. Are you getting personal advice?
Many investment services don’t offer personal advice which is an important part of investing. The way you invest won’t be the same as someone else because your financial situation will be different.
The problem with many investment apps and online investment advisors is that they only provide a product menu, and it’s your job to pick products from the choice of options.
This means that the online provider takes no responsibility if you choose the wrong strategy and it’s your job to continually check that the strategy you chose is suitable for your investment timeframe and goals. This means you could end up taking too much or too little risk.
Stockspot was the first service in Australia to offer personal investment advice online. This means we consider each client’s personal financial circumstances when making our investment recommendations.
Each client receives an annual review which ensures our advice stays consistent with your changing circumstances and life goals.
Remember, if you’re not getting a Statement of Advice, you’re not getting personal advice.
3. Do you own your investments?
Each Stockspot client owns all of their investments in their own name. This means that clients are the legal owner of their investments.
The main benefit of direct legal ownership is the ability for individual personalisation, full clarity on tax and more flexibility if you decide to stop using the service.
For instance, we allow clients to transfer their investments to another broker if they decide to stop using Stockspot. We don’t charge a fee to transfer which means that clients are free to come or go as they wish and are not forced to stay with us.
Most new platforms are structured as ‘managed investment schemes’ or ‘funds’ rather than personalised portfolios. This helps keep trading costs low since everyone is part of the same pool, and trading can happen for everyone at the same time.
The downside of this model is that tax reporting can be more complicated and you may not be able to access the full tax benefit of ‘franking credits’ or reduced foreign withholding tax. Academic studies have shown the value of franking tax credits in Australia to be 0.35% to 0.55% per year, which could be money you’re missing out on if you invest via a fund.
You may also be sharing the ongoing tax liabilities of the fund which can be a significant drag on your investment returns over the long-term. Additionally when you leave a fund you won’t be able to take your investments with you and you’ll be forced to realise a tax gain if you’ve made profits.
If you’re researching your investment options, you should ask the following questions:
- Is each portfolio individually personalised or am I part of a fund?
- Are the investments owned legally and beneficially by me on my own HIN (Holder Identification number) at the registry – or held by a custodian?
- Will I receive the full benefits of franking credits and the reduced foreign withholding tax from Australia’s Double Tax Agreement with the US?
- Does the service provide full take reporting on each ETF?
- Can I transfer my holdings to another broker without realising capital gains?
4. Where is your money being held?
When you invest you always have some level of market risk. But sometimes you also have other risks that are less obvious, more dangerous and ones that you’re not getting compensated for.
One of those risks comes from whether the investments are legally held in your name, or whether they are held on your behalf by another party or ‘counterparty’.
Counterparty risk is something we take very seriously at Stockspot and the reason why all assets are held beneficially and legally by our clients rather than using a trustee or custodian which exposes clients to counterparty risk.
There are too many examples in Australia of clients losing money due to counterparty risk – MF Global, Storm Financial and Opus Prime just to name three recent cases. Stockspot and our partner businesses never have any right to take custody of our client assets.
Many other investment apps, or robo advisors in Australia don’t currently ensure the security of their client’s assets in this way. Investments are ‘co-mingled’ in one big account and only separated behind the scenes. Sometimes not even in Australia. This poses a significant risk.
Before you invest, always be on the look-out for words like ‘custodian’, ‘trustee’, ‘house account’, ‘pooled account’ or ‘fractional units’ in the product documentation. These all signal that you’re putting your trust in another business to hold onto your investments and account for them correctly.
In the Financial Services Guide (FSG) or Product Disclosure Statment (PDS) look out for words like ‘custodian’, ‘trustee’, ‘house account’, ‘pooled account’ or ‘fractional units’. These all indicate that your investments are being held by someone else. If your money is held by a custodian you are exposed to additional risks.
5. Track record and investment expertise
Automated investing is a marriage between technology and investment expertise so make sure the boxes are ticked on both fronts.
Important questions to ask:
- How long has the service been around and what is the actual performance track-record (ignore ‘back-testing’) of the investment strategies?
- What experience and track-record does the team have in managing money?
- Are you confident in their asset allocation expertise?
- What experience do they have on compliance and risk management to ensure that business risks are mitigated and client funds safeguarded?
6. Is the advice independent?
As highlighted by the recent financial planning scandals, some advice businesses are biased towards their own financial products and investment platforms.
We haven’t seen this happen in the robo-advice space in Australia yet,but in 2015 Schwab launched a robo-advice service in the US that mainly contains its own products and is therefore full of conflicts of interest. We think it’s only a matter of time before a product manufacturer launches something similar here.
This may lead to conflicted advice where the product recommendation has been influenced by product commissions.
7. What is the client care like?
You should expect the same level of service from a robo-adviser as Uber, Airbnb or your favourite online store. If the experience is clunky, the customer service is poor, don’t be afraid to take your money elsewhere.
