Man and machine ‘can work together’

Don’t be concerned if your human adviser starts co-planning with a robot – the arrangement is likely to benefit you. Laura du Preez reports

The introduction of the roboadviser could mark the beginning of productive partnership between traditional financial advisers and technology, which will ultimately benefit you, the delegates at the Financial Planning Institute’s annual conference in Sandton heard this week.

Beyond the obvious benefit of extending simple, low-cost financial services, the conference heard how robo-advisers are likely to give you more tools to understand and test your financial plans and are likely to complement, at least for now, rather than replace your human financial adviser.

Marius Kilian, a director at Independent Investment Partners (2IP), which helps financial advisers to construct investment portfolios and research asset managers, says roboadvisers are automating parts of the process of getting financial advice and are part of the financial advice industry’s natural evolution.

Increased automation will make advisers more efficient, and it is likely that, in future, there will be co-planning with robo-advisers: the human planner will sit with both you and a robo-adviser, he says.

Kilian says that currently roboadvisers ask you questions about, for example, your ability to tolerate investment risk, what you need from your investment and for how long you want to invest.

He says they do a simple assessment of how much investment risk you can tolerate, but they do not replace the human adviser’s ability to determine how much investment risk you need to take or your capacity or ability to take risk.

The robo-adviser uses this information to automate the construction of an investment portfolio that should deliver the investment returns you need over the given time horizon without exposing you to more risk than you can tolerate.

Kilian says robo-advisers typically use low-cost passive investments to build the required portfolio. This is a response to pressure to reduce the costs of investing.

Human advisers who make use of robo-advisers give you, their client, more ways to access their services and 24-hour access to information.

Kilian says robo-advisers are focused on simplicity and transparency, and can help you to see your investments relative to your goal, instead of an investment benchmark that may feel less relevant for you.

In May, Sygnia, a recently listed financial services group, launched a robo-adviser that offers investments in the group’s low-cost index-tracking funds.

Magda Wierzycka, the chief executive of Sygnia, says that, for now, local robo-advisers offer simple, goal-oriented investment advice aimed at the do-it-yourself techsavvy investor who is cost-conscious and possibly a first-time investor. They do not, at this stage, offer holistic financial advice about life and disability cover, tax or your estate after death, she says.

Kilian says millenials ( born between 1980 and 2000) will drive the growth in the use of robo-advisers as they are now the biggest portion of the world’s workforce and are entering their prime incomeearning years.

However, he says robo-advisers will also appeal to wealthy individuals who made their own fortunes.

An important benefit for you if you use a human adviser is that an adviser can coach you and help you to avoid behaviour that is detrimental to your investments. Poor investment decisions explain a large part of many investors’ poor returns over time.

Most robo-advisers don’t coach investors, but Kilian says that one United States robo-adviser, Betterment, has introduced what is known in the industry as “in-time education”. For example, when markets are volatile it sends emails to investors telling them that they need to ride out the volatility to get the returns they need.

Kilian says another advantage of using a robo-adviser is that you may get a more diversified portfolio. US research showed that robo-advisers’ portfolios were more diversified and therefore less risky than those of their human counterparts.

Kilian says a benefit for human advisers is that the administration process is automated and roboadvisers also do automatic rebalancing of your portfolio when market movements result in your investments being out of line with the allocation you should have across asset classes in order to reach your investment goals.

Theo Vorster is the co-founder of Galileo Capital, an independent financial advice firm that has developed an investment roboadviser called SmartRand.

Both he and Wierzycka told advisers at the FPI conference that their robo-advice technology was available to other advisers to customise for the benefit of their clients, while Rob Pritchard, the head of product, wealth management at Iress, a provider of software that assists financial planners, says Iress will help existing advisory firms to build robo-advisers.

Wierzycka says human advisers can use robo-advisers to offer a simple do-it-yourself investment service if you are not yet ready for a full advice service.

Alternatively, your adviser can use Sygnia’s robo-advice technology to offer you his or her own customised investment portfolios on the Sygnia platform.

Another way human advisers could use a robo-adviser is to show you simply how you can achieve your investment goals before introducing more complex aspects of financial planning.

Vorster says Galileo started SmartRand because it realised clients want to get financial planning services in different ways: some would like to see a human adviser, while others prefer an online service.

Vorster says stockbrokers were initially sceptical of online trading platforms. Now almost every stockbroker has an online service and most people make use of both online and human stockbroking services to a greater or lesser extent, in line with their preferences.

He says people will use roboadvice services as a discussion point: they will be able to get a view of their entire portfolio and will then be able to question a human adviser about it.

Kilian says the growth of assets invested through robo-advisers in the US has been slow, but a big trend is that large financial services companies, such as Schwab and Vanguard, are buying robo-advice software and making it available to their advisers to make them more efficient and effective.