Investing the robot way
For some time, it has been difficult for people with smaller amounts of money to obtain financial advice. Many financial advisers require a minimum amount of money to invest (perhaps $100,000, sometimes more, but seldom less). The basic business model for many financial advisers is they charge a fee based on Assets Under Management (AUM). For example, on an amount of $100,000 invested they may charge 1 per cent or $1,000 p.a.
Given compliance requirements and work required to find, set up and advise the client in writing, many financial advisers would not think it worthwhile to take on a client who would yield less than this.
That means people with less money to invest cannot get financial advice. That leaves small investors in a hole.
But help may soon be at hand.
Roboadvice is investment advice and management that comes automated via a computer. There is no human interaction but instead, advice is given by an algorithm from the roboadviser’s computer programme.
The process varies but usually starts by the client filling in a form giving information which not too dis-similar to the forms most financial advisers use. An algorithm decides the amount of risk the client should take. In doing so, a computer settles on the client’s asset allocation the percentage in shares, property, bonds and cash.
The client then nominates the amount of money to invest and the roboadviser automatically buys managed funds in the right proportion (the funds purchased are often passive index trackers).
As you would expect, this process, being without human intervention, is cheap - regardless of whether you are investing $50,000 or $5 million, running a robot does not cost much.
In the US, it is estimated that there will be US$255 billion under management via roboadvice by 2020. It is not yet in New Zealand, as the regulations of 2011 did not allow for it, but with a review of the Financial Advisers Act in progress, that is likely to change.
You might think that all of this has financial advisers quaking in their shoes: lots of robots about to steal all their clients. Well, maybe, but remember that questionnaires and computers are binary: they are yes or no, 1 or 0. They do not take into account human nuances - not yet, anyway.
Good financial planners should still be able to add value with their human touch. Even in a brave new world of robots turning out their yes/no advice very cheaply, financial planners who are clientcentric and who concentrate on the right things ought to still make a living.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at .