Cost of in­vest­ing $50,000

Au­to­mated fi­nan­cial advice is set to en­joy a boost, thanks to dis­turb­ing reve­la­tions at the royal commission

Money Magazine Australia - - CONTENTS - STORY SU­SAN HELY

The Hayne royal commission has blown fi­nan­cial plan­ning apart by ex­pos­ing the in­dus­try's high fees, lack of trans­parency and con­flicts of in­ter­est. This is sim­i­lar to what hap­pened in the US after the GFC, says Pat Gar­rett, CEO at the online fi­nan­cial ad­viser Six Park.

What emerged there – and now in Australia – is a new breed of fi­nan­cial ad­viser that is dis­rupt­ing the sta­tus quo.

Th­ese robo ad­vis­ers use tech­nol­ogy to give au­to­mated, per­son­alised advice to match you to the right in­vest­ment strat­egy. They pick the best low-fee prod­ucts and ad­just your port­fo­lio to match your risk pro­file. They take care of your an­nual tax state­ments as well as broking and trad­ing.

Robo ad­vis­ers have taken off in the US with 1.6 mil­lion in­vestors signed up, but they have been slower to catch on here. Only around 22% of Aus­tralians are fa­mil­iar with them, ac­cord­ing to re­search house In­vest­ment Trends.

Just like Uber or Airbnb, th­ese online dis­rup­tors of­fer valu­able, straight­for­ward ser­vices for low fees. The royal commission heard how re­tail su­per fund MLC MasterKey (owned by NAB) charged a fee of 5.8% plus a plan­ner ad­viser fee of 1.5%, a to­tal of 7.3%. An­nual charges on a $50,000 in­vest­ment would be $3650. In con­trast, robo ad­viser Stockspot charges $455 a year (0.91%) on the same amount.

“We want to do away with the high fees, con­fus­ing jar­gon, end­less pa­per­work and lack of trans­parency that gives the wealth man­age­ment in­dus­try a bad rep­u­ta­tion,” says Chris Brycki, founder and CEO of Stockspot, one of the long­est-stand­ing Aus­tralian robo ad­vis­ers, which opened its doors in 2013.

After all, not ev­ery­one needs or wants a face-to-face meet­ing with a fi­nan­cial plan­ner, or a com­plex plan. Of­ten, like mil­len­nial Matt Camp­bell, they have spare funds, such as $10,000, lan­guish­ing in a low-in­ter­est cash ac­count or term de­posit that isn’t even keep­ing up with in­fla­tion. Matt wanted some sim­ple fi­nan­cial advice about diver­si­fied in­vest­ments that are flex­i­ble, trans­par­ent, easy to use and not too ex­pen­sive. For the price of a cou­ple of beers at the foot­ball – around $18 – he has had his $10,000 man­aged by Six Park for five months.

For many peo­ple sim­ple in­vest­ing is the way to go.

“There is a mas­sive mis­con­cep­tion that as you get more money you need a more com­plex and so­phis­ti­cated in­vest­ment strat­egy,” says Brycki. “Over-com­pli­cat­ing your in­vest­ments and over-trad­ing can be detri­men­tal. When it comes to in­vest­ing, sim­ple al­most al­ways wins out. The less you do, the more you get.”

While there are fi­nan­cial ad­vis­ers who ar­gue the need for one-on-one advice, oth­ers are join­ing forces with robo ad­vis­ers.

“The Aus­tralian fi­nan­cial ser­vices in­dus­try is ripe for dis­rup­tion as more and more in­vestors take no­tice of dig­i­tal advice so­lu­tions as an al­ter­na­tive to tra­di­tional advice mod­els,” says Re­cep Peker, re­search di­rec­tor at In­vest­ment Trends. He says many online in­vestors tend to re­gard them­selves as early adopters of in­no­va­tive so­lu­tions, so there is lit­tle sur­prise to see ris­ing aware­ness and use of providers such as Raiz (for­merly Acorns) and Stockspot.

Robo ad­vis­ers use a cal­cu­la­tion en­gine that has rules and al­go­rithms that power its rec­om­men­da­tions, says ac­tu­ar­ial firm Rice Warner. You are asked about your in­come, as­sets, fi­nan­cial goals and risk tol­er­ance. The an­swers drive au­to­mated rec­om­men­da­tions that are typ­i­cally a low-cost port­fo­lio of diver­si­fied ETFs that suits your risk pro­file.

Risk has tra­di­tion­ally been worked out as a per­son’s aver­sion to cap­i­tal losses re­sult­ing from mar­ket volatil­ity, says Rice Warner. But more re­cently it has moved to­wards the prob­a­bil­ity of achiev­ing a tar­geted ob­jec­tive, such as the level of in­come in re­tire­ment.

Robo ad­vis­ers lay out the in­for­ma­tion clearly – in­vest­ments, advice, port­fo­lio man­age­ment, fees and the team be­hind the in­vest­ments.

MEET YOUR ROBO AD­VISER Stockspot

• What you get: Per­son­alised advice, an in­vest­ment strat­egy made up of low-fee ETFs, au­to­matic port­fo­lio re­bal­anc­ing, bro­ker­age and man­age­ment of an­nual tax state­ments. Five core strate­gies rang­ing from a con­ser­va­tive to high growth (Aus­tralian, global and emerg­ing mar­kets, bonds and gold). As well Stockspot of­fers themed in­vest­ments that in­clude a sus­tain­abil­ity ETF and a US shares ETF.

• Min­i­mum in­vest­ment: $2000.

• What it costs: Port­fo­lios un­der $10,000 are free for the first six months and then cost $5.50 a month. Ad­min­is­tra­tion and advice fees range from 0.39%pa to 0.66%pa, de­pend­ing on how much you in­vest. In­vest­ment man­age­ment fees are 0.26%pa to 0.28%pa. Clients in­vest­ing for chil­dren (18 years and un­der) can in­vest free up to $10,000. You can top up reg­u­larly with­out be­ing charged bro­ker­age. No exit costs. To­tal cost for a $50,000 bal­anced port­fo­lio $455pa (0.91%).

• Back­ground: Stockspot was launched by Chris Brycki, now CEO, in 2013. The five core port­fo­lios have re­turned an av­er­age of 5.6%pa to 7.9%pa since in­cep­tion.

In­vestSMART

• What you get: Through In­vestSMART’s robo advice (it has a range of other ser­vices too) you get an­nual tax state­ments, daily per­for­mance re­port­ing, four diver­si­fied port­fo­lios as well as sin­gle as­set classes.

•Min­i­mum in­vest­ment: $10,000 per In­vestSMART diver­si­fied port­fo­lio.

• What it costs: Ad­min­is­tra­tion fee $5.50 a month or $66pa. Advice fee 0.55%pa. Bro­ker­age, about $60. ETF in­vest­ment man­age­ment fee 0.20%pa. To­tal cost for a $50,000 bal­anced port­fo­lio $501 (1%) for first year and $441pa (0.98%) for sub­se­quent years.

• Back­ground: In­vestSMART (ASX: INV) is an ASX-listed fi­nan­cial ser­vices com­pany with 32,000 clients and $1.4 bil­lion. The four port­fo­lios re­turned 3.98% to 6.4% over the past three years. As well as robo advice, it of­fers a separately man­aged ac­count ser­vice as well as an ac­tive ETF, Aus­tralian Eq­uity In­come (ASX: INIF). (Money’s Paul Clitheroe is chair­man of In­vestSMART.)

Raiz

• What you get: Six diver­si­fied port­fo­lios from con­ser­va­tive growth to ag­gres­sive as well as a so­cially re­spon­si­ble port­fo­lio made up of ETFs listed on the ASX.

• Min­i­mum in­vest­ment: $5.

• What it costs: Ad­min­is­tra­tion fee 0.275%pa for more than $5000. Main­te­nance fee $15pa on amounts less than $5000. ETF in­vest­ment fee ranges from 0.22%pa to 0.42%pa. Trans­ac­tion costs of 0.04%. To­tal cost for a $50,000 bal­anced port­fo­lio $267pa (0.53%).

• Back­ground: Raiz In­vest Australia was for­merly Acorns Grow Australia, which launched in Australia in 2015 as a joint ven­ture with Acorns US. In Jan­uary 2018, the joint ven­ture ar­range­ment ended and the busi­ness changed its name to Raiz. The av­er­age re­turn is 10.1% over the year to the end of May.

Six Park

• What you get: Advice, rec­om­mended port­fo­lios, bro­ker­age, pe­ri­odic re­bal­anc­ing of your port­fo­lio and re­port­ing. Five port­fo­lios from con­ser­va­tive to ag­gres­sive, each made up of up to seven ASX-listed ETFs that in­clude global in­fra­struc­ture and emerg­ing mar­kets as well as stan­dard as­set classes.

• Min­i­mum in­vest­ment: $10,000.

• What it costs: Tiered pric­ing from 0.5%pa to 0.3%pa plus ETF fees that av­er­age 0.25%. To­tal cost for a $50,000 bal­anced port­fo­lio $375pa (0.75%). Six Park does not pay or re­ceive com­mis­sions from any fi­nan­cial providers.

• Back­ground: Six Park’s team has more than 100 years’ com­bined ex­pe­ri­ence in the fi­nan­cial ser­vices in­dus­try. Port­fo­lios re­turned be­tween 3.5% and 10.8% in 2017-18.

Qui­etGrowth

• What you get: Per­son­alised advice and five port­fo­lios, from low to high risk.

• Min­i­mum in­vest­ment: $2000.

• What it costs: No fee on the first $10,000, then tiered fees from 0.55%pa to 0.66%pa. Also ETF and buy/sell fees. To­tal cost for a $50,000 bal­anced port­fo­lio $350pa (0.70%). •Back­ground: Man­ag­ing in­vest­ments since Au­gust 2015. Co-founders are Dilip Sankarreddy and Kru­pakara Chin­nasani. Part­ners are Saxo Cap­i­tal and HLK Group.

Clover

• What you get: Five risk-pro­file port­fo­lios that have a so­cially re­spon­si­ble in­vest­ment op­tion as well, giv­ing 10 port­fo­lios in to­tal. State­ment of advice is in­cluded.

• Min­i­mum in­vest­ment: $2500.

• What it costs: The fee, which in­cludes bro­ker­age, is 0.66%pa plus ETF fees of about 0.19%pa. To­tal cost for a $50,000 bal­anced port­fo­lio $425pa (0.85%).

• Back­ground: Launched in July 2017 by three fi­nan­cial ser­vices pro­fes­sion­als, Harry Che­may, Sahil Kaura and Darcy Naun­ton. One-year re­turns to the end of June were 3.8% to 11.8%. Case stud­ies next page

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