Robo-advisors: Should you use them?

A LOT OF PLUSSES: BUT THE PLATFORMS CANNOT PROVIDE EVERYTHING

Robo-advisors typically target investors in their 20s and 30s, who are starting to save.

The number of investment products available to South Africans runs well into the thousands. Understanding the options, deciding which is best and putting these into one comprehensive investment portfolio is no mean feat.

Enter the robo-advisor

Robo-advisors are online platforms which provide an automated investing service. The aim is to solve issues of managing an investment portfolio for clients, thereby removing the middleman.

Typically, the client completes an online investment process – consisting of a risk questionnaire and information about the client’s financial goal.

The data’s analysed, and the platform automatically recommends a pre-constructed investment portfolio based on information provided.

Robo-advisors usually have a number of pre-constructed investment portfolios, which they recommend by matching an investor’s risk appetite with the portfolio’s risk level. The final step shows the investor an interactive dashboard with their proposed investment, often with additional explanatory information.

The whole process can be completed online with little administrative burden.

Typically, robo-advisors target investors in their 20s and 30s, who are starting to save for their personal and retirement goals.

Historically, this demographic has been under-serviced by traditional financial advisors due to their relatively low net income. This generation enjoys using technology and likes to do their own research.

Benefits

Apart from the convenience factor, a drawcard for robo-advisors is the ability to keep costs low compared with their human counterparts. The fee savings are due to the automation process of acquiring new clients and using passive products in their investment portfolios.

The underlying products used by robo-advisors are primarily passive, such as portfolios of exchange-traded funds (ETFs). The benefits of low fees together with the use of ETFs will have a significant positive impact on the longterm performance of these investments.

Historically, high net value individuals could negotiate lower fees depending on the amount they invested. Robo-advisors pass this benefit to all income groups irrespective of the sum invested.

Drawbacks

The most prominent criticism of robo-advisors is that one size doesn’t fit all. One can make a strong argument that human advisors can have a much better feel for an investor’s financial position and give a better overall service.

Cash-flow planning, liability analysis, existing portfolio restructuring and estate planning are currently beyond the capabilities of a robo-advisor.

There’s also the important question of how the underlying investments in the investment portfolios were selected. Is the robo-advisor truly independent and does it look at all investment options in the market? Is it part of a product provider and therefore recommends only their products? Based on the answers, the investor should have an indication of what level of independence they’re receiving from the robo-advisor.

Igor Rodionov is MD of Advicement Investment Services, involved in fin-tech solutions, including a locally-developed robo-advisor.