Choosing the best investment app or robo adviser

Here are 6 important considerations for anyone looking at using a robo-advice service or automated investment app.

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 ordinary people invest smarter.

We’ve now had over 400,000 Australians visit 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 businesses continue to gain traction around the world. Not only are these services demystifying investing for the younger generations, but they are also helping those in their 50’s, 60’s and 70’s invest with less stress.

Recent research suggests that the amount of money managed by robo-advisers will grow 100x from less than US$20 billion at the start of 2015 to US$2.2 trillion by 2020 as more people of all ages embrace technology to simplify managing their investments.

Source: AT Kearney

Over the past year there have been some new robo-advice services and automated investment apps launch in Australia. The increasing choice means that consumers now 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 6 important considerations for anyone looking at using a robo-advice service or automated investment app.

1. What are the total costs?

When we asked our clients, low fees were one of their most important factors for selecting an automated investment service. This makes sense because automated investing can be less than half the cost of seeing a traditional adviser and investing in active funds.

We have always believed in keeping our fees simple, clear and transparent. That’s why our 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. There are no hidden costs in the background. That’s how we think investing should be.

Other automated investment products we’ve seen have a low ‘headline’ management fee but then 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 which we strongly believe is not in the best interest of our clients.

  • Some charge for advice but make you implement, monitor and manage your portfolio on your own. What good is advice if you have to pay layers of fees to actually invest?

  • 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

  1. Are there any additional fees that I should be aware of?
  2. Are any fees open-ended or at the discretion of the service provider?
  3. What cost could I be paying in total once all fees are included?
  4. Do I need to pay brokerage separately?
  5. What about transaction costs?
  6. Netting fees?
  7. Implementation costs?
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2. Are you getting personal advice?

Stockspot was the first service in Australia to offer personal investment advice online. This means that we consider each client’s personal financial circumstances when making our investment recommendations.

We ask all clients to keep their profiles up-to-date throughout the year and each client receives an annual review which ensures that our advice stays consistent with their changing circumstances and life goals.

Many new investment services don’t offer personal advice. Instead they only provide a product menu where it’s your job to pick a product 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.

Our clients value personal advice because it means they don’t need to stress about continually checking if their strategy is right for them.

Important questions for your robo-adviser: advice

Is the service offering ‘personal advice’ or ‘general advice’?

Personal advice means your personal circumstances are being considered whereas general advice means they are not. A Statement of Advice is a legal document that is required by law to be given to a client whenever personal advice is being provided. If you are not getting a Statement of Advice, you’re not getting personal advice.

3. Personalised portfolio or fund?

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 not constrained to stay with us because of tax.

Most new products are structured as ‘managed investment schemes’ or ‘funds’ rather than personalised portfolios. This helps them keep their trading costs low since they can trade for everyone at the same time as part of a large pool.

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 value 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.

Important questions for your robo-adviser: personalisation

  1. Is each portfolio individually personalised or am I part of a fund?
  2. Are the investments owned legally and beneficially by me on my own HIN (Holder Identification number) at the registry – or held by a custodian?
  3. Will I receive the full benefits of franking credits and the reduced foreign withholding tax from Australia’s Double Tax Agreement with the US?
  4. Does the service provide full take reporting on each ETF?
  5. Can I transfer my holdings to another broker without realising capital gains?

4. Where is your money is 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 and we believe this is the best protection that exists to prevent misappropriation of your investments.

Many other automated investment services or robo-advice businesses 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.

We believe the reasonable ‘compensation’ for this additional type of risk is around 1% per year. In most cases however, clients are asked take that extra risk without getting compensated for it at all. That’s a potential ticking time-bomb you shouldn’t need to hold which is why we avoid it.

Important questions for your robo-adviser: custody

Are your investments are being held in your own name or combined with other clients under a custodian structure?

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.

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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. The Stockspot team spends as much time researching the investment universe, optimising our portfolio strategies and analysing the relationship between assets as we do on building our technology.

Each month we release an update on the Exchange Traded Fund (ETF) landscape including notable changes and we publish the Stockspot ETF Report annually.

Important questions for your robo-adviser: expertise

  1. How long has the service been around and what is the actual performance track-record (ignore ‘back-testing’) of the investment strategies?
  2. What experience and track-record does the team have in managing money?
  3. Are you confident in their asset allocation expertise and knowledge of the ETF universe?
  4. 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.

Important questions for your robo-adviser: conflicts

Does the robo-adviser or automated investment service earn income or a fee from any of their recommended investments or cash?

This may lead to conflicted advice where the product recommendation has been influenced by product commissions.

Expect great service

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 or something doesn’t feel quite right, don’t be afraid to take your savings elsewhere.

Find out how Stockspot makes it easy to grow your wealth and invest in your future.

Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

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