What really is robo-advice?

The topic of robo-advice has been gaining a lot of attention lately. That’s exciting for us because when we launched Stockspot in 2013, nobody knew what we were talking about.

Fast-forward a couple of years and robo-advice is gaining widespread acceptance as the way of the future for personal wealth management – not only in Australia, but right around the globe.

In March, a US research company released a report profiling the world’s 19 leading robo-advisers including Stockspot. The report estimated that the total assets managed by robo-advisers will grow from US$19 billion today to US$450 billion by 2020.

“The robo-advisor phenomenon will force the traditional wealth management industry to reconsider the generally accepted belief that wealth clients will always prefer the face-to-face contact of their own dedicated personal advisor.”

We believe that technology is fundamentally changing the investment industry, making it more accessible, affordable and honest. Our mission is to make this new breed of wealth management accessible to as many Australians as possible.

A generational change in behaviour and expectations will also impact the way people manage their finances. A recent study by KPMG1 found that 95% of young professionals, who will account for 70% of financial asset by 2030, do not have an adviser and 84% also don’t believe they need one. Traditional channels play a small role in their financial decisions with 74% of preferred channels not directly controlled by traditional financial service businesses.

Source: KPMG Australia

What is robo-advice?

According to Wikipedia, “Robo-advisors are a class of financial adviser that provide portfolio management online with minimal human intervention… they all employ algorithms such as Modern portfolio theory that originally served the traditional advisory community”.

Put simply, a robo-adviser is an automated online service that gives anyone access to professional quality investment skills without the need to see a human adviser. In the past, the ability to have an investment portfolio built based on each clients personal situation was only available to high-net-worth investors. But robo-advice has now made this available at a much lower entry level and with much lower fees compared to seeing a traditional human adviser.

Three myths about robo advice

Given the recent attention around robo-advice, we wanted to dispel a few common myths that are circulating:

1. Adviser software is robo-advice

Software that helps human advisers’ generate recommendations for their clients is not robo-advice. These are adviser software tools which have been used by advisers for years to help streamline their business processes. If it requires a human adviser, it’s not robo-advice.

2. Robo-advice is only for small investors

We disagree. As our ‘Fat Cat Funds Report’ highlighted, the high costs attached to most professional investment products make traditional advice expensive for larger clients too. That’s why many high-net-worth clients are also turning to robo-advice to manage their investment portfolios. We currently look after balances of anywhere from $2,000 to over $1 million, and our clients range from 18 to 80 years old. Robo-advice can help anyone invest smarter.

3. Robo-advice is no substitute for a human touch

This is a popular myth and the evidence just doesn’t stack up. Human financial advisers generally have a poor track record of letting their emotions (as well as financial incentives) get in the way of sensible investment decisions. Scores of advised clients went into the Global Financial Crisis over-leveraged as well as overexposed to the wrong risky investments. The same has happened in previous cycles like the tech boom in 1999 when brokers and advisers were overzealous and pushed clients into riskier and riskier stocks as markets rose.

Instead of adding risk when things are going well, robo-advisers like our service take the opposite approach of reducing exposure to profitable investments after periods of gains. Rebalancing portfolios in this way is industry best-practice and much easier for a robot to manage than a human adviser who is prone to herd mentality & emotions when markets are hot.

Benefiting from true robo-advice

In light of the growing number of businesses claiming to offer ‘robo-advice’, here’s what we think is important to understand when assessing different services:

First, check you’re actually getting robo-advice

If it requires a human adviser, it’s not robo-advice. If you are not getting a Statement of Advice – that’s not robo-advice either. 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. We have noticed a few investment website businesses that don’t actually provide advice, masquerading as robo-advisers. You’ll recognise them because they don’t ask any personal questions and don’t provide a Statement of Advice. If there’s no personal advice, there’s no robo-advice.

Track record

How long has the service been around, what’s the performance track record and experience of the team in managing money? Robo-advice is a marriage between technology and investment skills so make sure the boxes are ticked on both fronts.

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 recently Schwab launched a robo-advice service in the US that is jam packed with its own products and riddled with conflicts of interest. We think it’s only a matter of time before a product manufacturer launches something similar here.

Know where your money is being held

Are your investments are being held in your own name or combined with other clients under a custodian structure? If your money is held by a custodian you may be exposed to additional risks on the unlikely chance that client funds are not properly segregated.

Expect great service!

You should expect the same type of service from a robo-adviser as Uber, Airbnb or your favourite online store – no paperwork and a seamless experience.

Low fee, hassle-free investing

Stockspot is Australia’s fastest growing automated investment service. We can help you build and manage a personalised portfolio tailored to your financial situation and your goals. With Stockspot, there’s no paperwork, no need to be an expert and no hassles.

See what we recommend for you

Image: Kenny Louie via Flickr
1 Banking on the future: The expectations of Gen Y professionals

Related posts


Chris Brycki

Stockspot Founder and CEO

Leave a Reply

Your email address will not be published. Required fields are marked *