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An insider's view on robo-advice

An insider's view on robo-advice

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By Mark Fordree ·
January 22 2016

An insider's view on robo-advice

The biggest news in the financial advice industry is automated investment or robo-advice, but how it functions, the performance it can generate and how it can complement advisers is far from understood.

First of all, there is a strong tendency in the industry and in the media to pit the robos against the traditional advisers, and I want to be clear that we (robo-advice firms) are building a business that is as constructive as it is disruptive to the traditional advice model.

If you think our offices are populated by robots with flashing lights who are working everything out, then that's a misconception. There are no robots. In fact in many ways our office resembles any other financial institution, with a management and staff team full of experienced financial experts and advisers. The only difference is perhaps our fresh crop of undergrad interns who add innovation and, of course, our highly experienced team of financial technologists.

Robo-advice will match the performance of advisers

The million-dollar question is whether robos can match the level of advice given by traditional advisers, or even outperform them, but that question really misses the point.

The automation of risk profiling and risk matching to globally diversified, multi-asset portfolios for the 75 per cent of Australians who can't access an independent adviser is the critical issue.

We can use regression analysis to generate more than 10 years of data to prove conclusively that algorithms accurately match the risk profiles that they are designed to track.


All of the evidence shows that only a small minority of fund managers outperform the index over a five-year period and the number of fund managers who outperform the index over 10 years is so small as to be negligible. So the simple answer is that yes, historical data proves that over a 10-year period robos will at least match the performance of traditional advisers.

Investing in a cost-effective and diversified portfolio 

The global trend is for people to invest in indexes rather than individual stocks. Exchange traded funds (ETFs) provide global diversification at an extremely attractive price point; the ETF market has gone from zero to $21 billion in 2016, with a rapidity that clearly demonstrates consumer demand.

What puts automated advice ahead is the scalability of the advice, low costs and resultant low customer fees. The massive reduction in the amount of fees charged leaves the customer more to save and invest.

In our case, our basic model consumer product has fees of $198 per annum and a $0 funds under management (FUM) fee. We make no profit on brokerage fees, passing on only the online broker's minimal fee (the higher of $11 or 0.05 per cent of trade value), meaning that while we give our customers daily updates on their portfolio and the opportunity to rebalance 24 hours a day, we have no incentive to encourage churn, again saving the customer unnecessary costs.

Partnering with advice firms

Far from competing with traditional advice businesses we are forming partnerships with the most forward-thinking Australian financial institutions to support them in growing their businesses using technology.

The greatest challenge for advisers today is the cost of compliance. The majority of adviser groups are prohibited from accepting clients with investable assets of less than $250,000. Our research tells us that this leads the larger advice houses to turn away between three and five customers every single working day.

Our technology generates a compliant statement of advice, reducing the cost of onboarding and allowing advisers to monetise previously uneconomic clients, as well as allowing advisers to profitably service intergenerational clients who they were previously forced to refuse or service at a loss.

While many of the people initially attracted to the automated business will be low-balance clients who cannot access traditional advice and millennials seeking a transparent, high-tech solution, we are also seeing interest from investment-savvy individuals who are quite happy to decide their own investment strategy, and utilise our portfolio construction capabilities to implement that strategy.

We will see a lot of advancement in this trend over the next 12 months.

Integrating robo-advice and advisers

We know that advisers bring much more value to their clients than simply designing portfolios; clients turn to their advisers for personal contact.

Our system provides the option for customers to speak to an adviser, and for adviser groups white-labelling the platform, this means that the system is drawing customers back into traditional advice and generating billable hours.

Over the last couple of years the topic of robo-advice has moved from an interesting subject that was relatively unknown to a common conversation in every strategy meeting in every wealth management business in Australia.

We believe that technology and innovation are going to have a rapid and profound impact on the wealth management industry. It's my view that the deployment of automated advice will be as commonplace as ATMs and internet banking within two to three years.

My forecast is that we are going to see a dramatic divergence between advisers who embrace technology, with all its obvious benefits of increased engagement, automated compliance, and the growth in the advice market pool and those who don't.

 Mark Fordree is the chief executive of Ignition Wealth. 

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