Robo: a personalised portfolio for the price of a couple of beers
Automated financial advice is set to enjoy a boost, thanks to disturbing revelations at the royal commission
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
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 in July 2013.
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 (0.88%) 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 5.29% to 9.27% over the past three years till July 2018. 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.)
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.
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.
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.
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%.
Returns are for different time periods depending on how long the robo advisers have been established. Money magazine prefers to publish returns over the long term.
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