Warning: Don't ignore roboadvice

He spoke about global trends in adviser technology at the IFA/PAA joint conference last week.

Logan said advisers could not ignore the prospect of robotic competition. “Wealth management and the advice industry is ripe for disruption in the same way that iTunes and Uber have disrupted their industries.”

There is US$15 billion invested through roboadvice but that is predicted toincrease to US$255 billion in the next five years.

Many offerings promote their low fees. Most charge between 0.15% and 0.35% of client FUM.

Logan said technology was shifting advice from the traditional, delegated model where an adviser had the monopoly on information, to a model where they would act as a coach for clients.

Advisers could face challenges from a rise in “investor communities” as roboadvice took hold, where clients could trade opinions, predictions and advice with their peers.

Roboadvice algorithms would develop quickly. “They are in their infancy but are going to scale quicker than Google’s. We’re hearing about algorithms that predict behaviour based on what other clients do. If a client panics [in a downturn] and wants to rebalance it will come back and say ‘last time you did that, this happened… other people are doing something different’.”

He said some advisers would be more affected by roboadvice than others. Those who did not offer much beyond asset allocation might find it hard to prove their value proposition, especially to clients who were naturally more interested in taking a DIY approach.

“Roboadvisers are coming and they’re going to impact some of your businesses and clients,” Logan said.

A roboadvice offering was developed in IRESS’ latest annual hackathon, a collaboration between its teams worldwide to come up with new ideas.

Logan said it was designed to run on top of IRESS’ existing software and push business back to advisers, generating referrals as clients chose products and services. “Clients who want to validate that [robo] advice will contact an adviser and say ‘am I making the right decision?’”

Comments from our readers

On 15 June 2015 at 11:26 am Pragmatic said:

I agree with Andrew Logan. NZ has low levels of superannuation and tax complexity, meaning that the primary reason that consumers seek financial advice is in relation to their investments. Advisers who provide a commoditised service (ie: one size fits all, passive), tend to place an over reliance on the so called ‘relationship premium’ – meaning that they believe consumers will continue to pay them annually, because they ‘like’ their adviser. The challenge is that tactical asset allocation shifts occur infrequently, and in many cases can be administered by the consumer without the assistance / cost of a financial adviser. This industry price pressure will only continue to get worse, as the average portfolio returns reduce, encouraging consumers to consider alternative strategies.

The solution is for advisers who don’t want to be replaced by technology and/or disintermediation, to be very clear about how they add value, and why consumers should continue to pay them on a regular basis. A simple ‘tick the box’ approach, or “markets are efficient” mentality will leave those advisers to compete against cheaper more effective solutions.

To understand how quickly an intermediated financial services industry can dissolve, you only need to look at the growth of Self-Managed Super Funds (SMSFs) in Australia - which have grown from $0 in 2007 to over $520bn today (and are now over 20% of the Australian accumulated savings, with little signs of slowing down). Here is an industry that is ripe to be replaced by a quicker more efficient technology solution.

On 15 June 2015 at 4:55 pm Brent Sheather said:

There is no way I would take advice from a stupid fool robot...um....unless of course the robot was managing my index fund....

On 16 June 2015 at 12:39 pm AFA Muggins said:

Pragmatic said: "the primary reason that consumers seek financial advice is in relation to their investments".

If that is your sole value proposition, I think days in the profession may be numbered.

As an profession we need to be doing much more for clients. In beating the odds, I have managed to provide a fee for service proposition for clients that not only assists with investment recommendations, but actually deals with their goals and objectives and encompasses such 'simple' things as developing their cash flow management plan.

I agree with Pragmatic on one thing though - If I went to an adviser and was simply looking at asset allocation, I would be wondering where the value lay.

On 17 June 2015 at 9:35 am Brent Sheather said:

There are two aspects to the “value for money” proposition, obviously. Firstly, the service that you offer and secondly the cost. We decided that instead of sending clients birthday cards and remembering the name of their pet ferret, we would concentrate on investment advice at a reasonable cost which surprisingly is a little below that apparently offered by the robot.

On 17 June 2015 at 3:52 pm Pragmatic said:

Brent can you please clarify your fees being lower than Robots.

In a past blog you noted that the average total fee paid by your clients in respect of an investment proposal including your monitoring fee but excluding initial fees is about 50 basis points. You have also made the point that you prefer passive investment over active, and advocate a simple “buy, hold and periodically rebalance” strategy.

Whilst many robo-advisers claim that they don’t charge advisory fees, commissions or service fees, recent research suggests that the cost to the consumer is from about 0.18% for a conservative portfolio to 0.26% for an aggressive portfolio – with the outcome being largely passive, with (presumably) a buy, hold strategy.

On 18 June 2015 at 8:56 am Brent Sheather said:

Hi Pragmatic
The FT did an article on Robo investing a while ago and they reckoned that the average monitoring fee of a balanced portfolio was about 30 basis points. I don’t know how they achieved exposure to each asset class but it is probably lots of passive. Our monitoring fee averages quite a bit less than 30 basis points. What’s more I don’t see how a Robo advisor could put together a balanced portfolio, as per that of the average NZ pension fund, for under 35 basis points.

By the way I don’t prefer passive over active. Best practice is clearly 50% active, 50% passive and our portfolios reflect that. What I do object to is people criticising passive investment based on bad data.

Regards
Brent Sheather

On 18 June 2015 at 11:00 am Pragmatic said:

Thanks for your response Brent. This is a useful insight.

It seems as though robots have figured out a way to provide conservative / balanced portfolios for less than 30bps - albeit I suspect that they bear little relationship with average super schemes (NZ or otherwise) which of course have much longer time frames than the average/most consumers

On 19 June 2015 at 8:16 am MPT Heretic said:

As is usual with any discussion on costs there is never any clarity on total costs or what you are actually paying for. My understanding is the 0.15 to 0.30% quoted is typically for providing a basic risk profile, asset allocation, product selection and valuation/reporting. In the US where trading costs are close to $0 it might also brokerage. When you add in the cost of the underlying ETF's the total cost is closer to 0.50% for investment advice. If you want financial advice you pay extra. If you want validation you pay extra. If you want brand security you pay extra.

The US model has the benefit of scale, product availability and home country bias of investors.

It would be interesting to hear what people thought comparable NZ cost would be right now for a sustainable business offering only investment advice....including GST, upfront costs, brokerage, underlying fund TER, asset allocation, product selection, corporate actions,valuation and reporting. My guess is its closer to 1% than 0.5%

On 19 June 2015 at 9:46 am R1 said:

Given that Brent has been in the business for a very long time compared to most and has significant FUM, I would suggest he has a sustainable model at the level of fees he charges. The challenge for the rest of us is how do we achieve that level of fees and make a reasonable income rather than trying to justify what we charge now. It normally takes years to grow a successful business and we have to put the client first to achieve success. I expect that if fees across the board were much lower more people would use our services because our returns were attractive.

Warning: Don't ignore roboadvice

Roboadvice is set to disrupt the adviser industry as much as iTunes has turned music on its head and Uber has upset taxi drivers, says Andrew Logan, GM of wealth at software firm IRESS.

Monday, June 15th 2015, 6:00AM 9 Comments

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