One solution to SA's "advice gap", where large numbers of people are in need of quality financial advice and too few people are qualified to give good, cheap advice, is robo advice.
Robo advisers are particularly appealing to younger people who have just started working and live their lives online. In South Africa there are large numbers of people in need of quality financial advice and too few people qualified to give good advice that is affordable to many ordinary consumers. One solution to this "advice gap" is robo advice, a relatively new offering from the local financial services sector.
"A decent robo adviser is better than a low-quality financial planner," says independent financial adviser Warren Ingram. "Bad advice is destructive over time. [Whereas] it's unlikely you will get a terrible outcome with a robo adviser," Ingram says.
Robo advice will raise the minimum standard of advice for people who can't afford to pay a qualified financial adviser for their time, he says.
What is a robo adviser?
If you're thinking of a robot dispensing advice, that's not what it is. A robo adviser is a digital platform, or app, which acts like an online financial adviser, says Grant Locke, the head of OUTvest. A robo adviser allows you to invest cost-effectively, in your own time and cuts out the administrative hassle - or the paperwork - that usually goes with investing, explains Sue Torr, the managing director of Crue Invest in a recent newsletter.
You're able to go online, complete a questionnaire and specify how much risk you're willing to take when investing, how much time you have to invest and your investment goal. The platform - or robo adviser - then chooses the most appropriate investment portfolio based on the information you’ve provided, Torr says.
Typically, robo advisers use a blend of low-cost passive investments, such as exchange traded funds, together with advanced digital algorithms to help you achieve your stated investment goal, she says. Robo advice is an attempt to codify the knowledge of a financial adviser into a platform that anyone can use, Locke says. "You need not know much about money, it's designed to make sure it's very hard for you to hurt yourself." By that he means make bad investment decisions.
Who is it for?
While it may be most appealing to young, tech-savvy people, it can be useful for anyone who has a simple, single investment objective, Locke says. For example, if your objective is to save for a child's education, a wedding, a deposit for a home or car, or trying to build an emergency fund, you can't go wrong using a robo adviser. But if you need to set up a trust or help with estate planning, a robo adviser won't be able to do that. Ingram says the generation comfortable with robo advice is probably only starting to accumulate assets now, having started their working lives three or four years ago.
What can't it do for me?
"If you need holistic financial planning, it's not what robo advisers are good at - yet," Locke says. "There's a lot of complexity in getting that right.
How can I tell if a robo adviser is any good?
Locke says a good robo adviser must:
- Have a reputable brand backing it;
- Be transparent in terms of what you're invested in and what it costs;
- Ask you questions you can confidently answer;
- Be more than digital with human advisers a phone call away if you need them. And their job is not to sell. It's to give advice.
Ingram agrees. "A good one isn’t simply a product push." Test a robo adviser by setting two different investment goals with different time horizons and see what the adviser is saying. If every savings goal produces the same recommendation, it may be a product push, he warns. For example, if one of your investment goals is to save in an emergency fund over the next three years, it would make sense for the robo to recommend you invest in a money market fund. But if you have 10 years to save for a deposit on a house, and the robo adviser still suggests a money market fund, beware.
"A good robo adviser will ask enough questions and place enough emphasis on understanding your time horizon and your ability to deal with risk and your tolerance for risk. All three factors are important," he says.
A robo adviser should offer between three and five different investment solutions, or portfolios: "You want a comprehensive range, with a money market fund on one side and a pure equity fund on the other side, and medium to high-risk balanced funds in the middle," Ingram says. The investment portfolios need not be from different investment houses; they may all be offered by the same provider. What's important is the mix of assets in a solution, he says.
Are robo advisers regulated?
Providers of robo advice are defined as "automated" advice providers by our regulators and Locke says there are additional hurdles for financial services providers (FSPs) to clear when offering advice in this way. "FSPs are accountable for the advice provided by a robo adviser. We must have proper technology, procedures and policies to ensure that our algorithms are correct," he says.
This article was published on the Sowetan Live Website on 01 November 2019.