Personal-Finance

Can a robot give you good advice

2017-10-12 11:10

One of the more common questions we receive at City Pres is where to invest. The answer is not a simple one because proper financial planning requires research and the correct investment objective must be ascertained before an appropriate product can be found.

For example, the first question is, do you have short-term debt and how much do you owe? It makes no sense to be saving when you are struggling to pay off your credit card at 28% interest a year. The next question is, do you have emergency funds available? Good money management starts with having funds that will cover unexpected events because an emergency is one of the main reasons people end up with short-term debt. Then you must still decide what you are saving for and how long you plan to invest for.

OUTvest, an online investment product launched by Outsurance, aims to replicate basic financial advice by asking you the correct questions to provide advice on the correct fund for your needs.

Does it deliver on its promise? Having tested the product this week, my conclusion is that it provides a reasonable service for someone who does not need complex financial advice.

The success is in its simplicity from a user perspective. You select your goal and reason for investing, and then answer some key questions. Based on your answers, a fund is recommended and, if you go ahead, it takes about five minutes to register and start the investment – including verifying all your Fica documents.

This simplicity belies a lot of work that has gone into the algorithms to provide the correct advice. According to Grant Locke, head of OUTvest, they have used extensive data that goes back as far as 115 years to assess market performance and risk. They have worked closely with CoreShares and S&P Dow Jones indices to design intelligent funds that use past experiences and continuing changes to moderate the investments.

When a fund is recommended, it provides an outcome projection of what your investment will be worth, based on your investment time frame. The outcome is illustrated in a range from a good outcome to a poor outcome, and the probabilities are attached. This at least gives you a realistic idea of what your funds should be worth when you withdraw them.

Depending on your answers to the questions, you may even be told not to invest. For example, in one trial run, I answered that my debts would take more than a year to pay off, I had no emergency fund and was likely to withdraw the money within a year – the robo advice was: “We think it is a good idea for you to consider repaying your debt and establishing a small cash reserve before you invest with us.”

Although OUTvest is using investment technology to advise clients, they also have a human element for those more complicated questions or for when an individual needs some assistance.

They also offer Crowdvest, a social version of investing that enables you to invite friends and family to invest towards a goal. For instance, grandparents could contribute towards a tertiary education savings goal for grandchildren, or friends will be able to collectively save towards a trip and invite others to support them.

WHAT YOU NEED TO KNOW

All the information is easily available on the website OUTvest.co.za, but there are some points to consider before investing:

  • The default investment is a tax-free savings account, although you can opt for a voluntary investment plan. There are no retirement products available at this stage.
  • OUTvest uses five funds that cover a range of time horizons and risk profiles – from a money market fund to an aggressive index fund. They use specially designed index-tracking portfolios managed by CoreShares.

Outsurance bought a 25% stake in CoreShares last month. The money market fund is managed by Granate Asset Management. By using index funds rather than actively managed funds, they are able to keep the investment management costs at 0.3% a year.

  • Fees range from 1.5% to 0.7% depending on how much money you decide to invest. There is an advice fee of 0.6%, an administration fee of 0.6% and an investment fee of 0.3%.
  • There is a minimum fee of R5 a month so, while you can invest as little as R100 a month, only R95 would be invested. This would not be ideal for short-term, low value amounts as you would be better off just putting your money into a high-interest bank savings account.

Fees are notoriously difficult to compare, but in comparison to investing in an actively managed unit trust through a financial adviser, you would be paying closer to 2.5% a year and you’ll possibly also have to pay an upfront fee.

You would pay closer to 1% a year when investing in a fund through index tracking investment platform Satrix without advice.

OUTvest has created a good starting point to address a gap in the market where people need some basic advice, but which is not financially viable for financial advisers. Its use of low-cost index funds keeps it simple and cost effective – too much emphasis is placed by the investment industry on fund performance, and not enough on advice and ensuring people are invested in the correct fund for their objectives.

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October 15 2017