The endless battle of man versus machine. Garry Kasparov checkmating Deep Blue. John Connor outwitting the Terminator. And now, robo advisers against financial advisers.
While these examples might seem a little dramatic, getting good financial advice doesn’t need to be a battle. Instead, it should be simple, transparent, and affordable.
In this article, we compare robo advice to human financial advice. We look at:
- What is a Robo Adviser?
- What is a Financial Adviser?
- Can robo advisers replace financial advisers?
- What is the difference between a robo adviser and a financial adviser?
- Are robo advisers good for beginners?
- Are robo investors safe?
What is a Robo Adviser?
A robo adviser, like Stockspot, uses online technology to invest in shares (or stocks) for clients.
Robo advisers typically ask clients questions about their individual circumstances – income, age, willingness to take risk, and financial goals.
The technology creates a recommended share market portfolio and automatically invests for the client based on the responses.
The service provided by a robo adviser is all done online via phone calls, emails, or webchats.
What is a Financial Adviser?
A financial adviser is a financial professional that offers financial advice to clients.
Financial advisers typically look at a client’s income, taxation circumstances, and future financial needs.
Financial advisers help clients make financial decisions about what to do with their money. They look at investing in the share market, investing in property, tax minimisation strategies or other recommended courses of action.
Financial advisers usually service their clients face-to-face and online.
Can robo advisers replace financial advisers?
No, and they’re not meant to.
Financial advisers and robo advisers both can – and should – have a place in the financial services world.
In the past, investors only really had two options. Do it all themselves or use an (expensive) financial adviser.
Robo advice is the perfect solution to this problem and a happy medium for the vast majority of investors.
Ironically, robo advice is also a great option for financial advisers who don’t have the capacity to service clients with smaller portfolios. If it is not financially feasible for a financial adviser to see a client, they could instead recommend a robo adviser to handle their investing options.
We outline the differences between the two and why robo advisers can’t replace financial advisers in the next section.
What is the difference between a robo adviser and a financial adviser?
There are several differences between a robo adviser and a financial adviser. These can be summarised as: cost; face-to-face; investment strategy; returns; and remuneration.
Cost
Financial advice is fast becoming a luxury item in Australia due to its prohibitively high cost.
According to Adviser Ratings, the cost of financial advice starts at a minimum of $3,500 per annum. This annual cost then balloons to around $5,000 when initial advice, implementation and ongoing support is factored in.
For most people, this sort of outlay is only worthwhile with a minimum portfolio of around $500,000 which equates to around 1% of the portfolio value.
Some financial advisers also have a minimum investment amount, for example, they will only service clients with portfolios valued at $200,000 or more.
Robo advisers charge a fraction of the cost of a typical financial adviser and are much cheaper. Stockspot charges 0.528% for balances of $500,000, equating to around $2,640 per annum.
Robo advisers also have a smaller minimum investment amount, with Stockspot recommending clients start with an investment amount of $2,000. Robo advice allows anyone to access professional investment advice without the need to see a financial adviser.
Face-to-face
Robo advisers typically have limited face-to-face interaction with their clients. Contact is done via emails, phone calls, webchats, and the client’s investing dashboard.
Financial advisers usually meet their clients face-to-face at least once a year. Interactions with clients can occur more frequently including weekly meetings.
Investment strategy
Robo advisers typically use a simple and diverse investment strategy for their clients. This usually takes the form of only purchasing – and holding – low cost ETFs that invest in a diversified portfolio of Australian shares, international shares, gold, and bonds. Stockspot recommends a set and forget strategy for clients with a minimum investment time frame of at least three years, but preferably up to seven years.
The investing and any rebalancing is done automatically so there is minimal human interaction.
Financial advisers usually employ a complex investment strategy. They invest in shares, property, and other securities. Financial advisers might also take into account the taxation situation of a client and other factors that could impact their client’s needs. Financial advisers use more discretion when it comes to investing.
Returns
Linked to the investment strategy are the returns. Robo advisers and financial advisers can give varying returns, but Stockspot has a consistent track record and has outperformed 99% of traditional funds over five years and 97% of investment managers.
Remuneration
Remuneration in the advice industry is a huge problem, as we saw repeatedly during the banking royal commission. Scandals from the banks, financial planners, and advice businesses, like Dixons Advisory, littered headlines with stories of blatant thievery and deception.
At its heart, financial planners were recommending products that were not in the best interests of clients. Instead, they sold their clients products that paid the adviser handsome commissions.
Robo advisers typically don’t have a relationship with the product issuer or the shares they recommend their clients buy. The only income robo advisers like Stockspot receive is from their clients. A good robo adviser would guard this relationship and ensure there is no conflict of interest.
Some financial advisers still have commercial relationships with the product issuer and the products that they recommend to their clients. In this instance, financial advisers receive a commission from both the product issuer and the client.
Are robo advisers good for beginners?
Yes. Robo advisers are perfect for beginners.
For those new to investing, robo advisers take into account your goals, risk profile, and investing time frame. From there, a portfolio of shares is built for you to invest in. Robo advice frees up clients’ time too, so there is no need to track the ASX, no need to see what is happening on the stock market daily, and no need to follow meme stocks.
Are robo investors safe?
Yes. Robo advisers that provide a Holder Identification Number (HIN) ownership model (as opposed to a managed portfolio model) are a safer and more transparent alternative for investors. Also, ensure your robo adviser has an AFSL.
HIN ownership means clients are not exposed to counterparty risk. Stockspot offers a full HIN ownership model. This simply means that a client’s shares are owned by them and not by Stockspot. Shares are not pooled with other investors either. This also applies to a client’s cash account.
If anything happened to Stockspot, it wouldn’t impact a client’s investments as those are owned by the client. Clients can simply transfer their investment in and out of Stockspot as needed. The client remains the legal owner.
