Robo-advisers and the mighty millennials
As their financial needs grow, they’ll benefit from advice that only humans can offer
ALTHOUGH robo-advice and the Fourth Industrial Revolution (4IR) are inevitable, they will affect the financial industry sooner than expected.
But is it all good, asks James Robinson, private client wealth associate at Alexander Forbes Wealth?
Robinson said the industry had to keep evolving and it was up to financial advisers to keep in line with clients’ needs and wants in order to remain relevant.
On how current trends were impacting the industry regarding robo-advisers and traditional financial (human) advisers, and whether millennials are the biggest group interacting with robo-advisers, he said anyone born between 1980 and 1999 was considered to be a millennial.
He said that according to Goldman Sachs, the group forms the largest demographic one in history, with a sizeable 2.3 billion millennials.
“There is a definite correlation between millennials working and communicating through various platforms other than direct face-to-face interactions.
“That being said, there will be many millennials choosing to use online platforms in order to meet their financial planning requirements. However, as the complexities of their financial needs grow, this will be a tremendously important stage for financial advisers to nurture relationships with millennials looking for that added benefit of the non-binary advice that can only be offered by a human,” said Robinson.
He added that industry practice had already shifted towards a greater online presence, whereby clients could gain access to their investment values, policy options and opt-in (or out) at the click of a mouse.
“Communication between advisers and clients has become electronic through emails, social media and video calls. This will become more and more relevant for the industry norm as millennials become a larger part of an adviser’s client book. The industry has to keep evolving and it is up to financial advisers to keep in line with client’s needs and wants in order to remain relevant,” he said.
Robinson added that in the primary stages of financial planning it was important to gather information to determine one’s income vs expenses.
“This budgeting tool will determine how much disposable income an investor will have to invest on a monthly basis after they have accounted for expenses such as rent, groceries and entertainment.
“It is at this stage that investors determine their risk profile in order to invest their funds into an appropriate term vehicle and fund mandate.
“Millennials can therefore determine a budget using a simple form which they can populate with their monthly expenditure which is deducted from their monthly income. The risk profile is determined using a questionnaire which will then base their answers on what sort of volatility they can handle as an investor,” said Robinson.
He said that as robo-advice was very binary in nature, millennial investors could use the online tools in order to start their investment journey and educate themselves through the online platforms.
“As people continue to grow older in their professions, accumulating greater wealth and taking on more financial burden with families, properties and business, it creates a more complex financial situation which requires a less binary approach to investment, tax, estate and risk planning. This is where a certified financial planner (CFP) is more relevant in order to create a trustworthy relationship with an experienced industry professional,” said Robinson.
He also advised the following when choosing which option to take:
At first glance, the main advantage of robo-advice is the cost reduction. There is little to no human interaction in this process, which drives costs down. In line with the cost cutting measures of digital advice, the mandate of your portfolio will most probably be aligned to a passive index fund which tracks a predetermined index (such as the JSE Top 40). There is much debate about the advantages and disadvantages of these funds over actively managed funds.
Financial advisers have a role to play in order to earn their fee.
Wealthier investors tend to have more complex finances that stretch beyond their personal investments, including their estate planning, trust planning, tax planning and their holistic financial plan which includes life insurance and the financial well-being of the client, their business and their family. This is where an approved CFP is crucial.
The human behaviour factors that tend to influence our inherent biases should also be taken into consideration by a knowledgeable financial adviser versus the simple algorithm of a robo-advice approach.