Personal-Finance

Robo-advice the way of the future?

2017-06-23 18:17

In the animated show The Jetsons, Rosie the robot cleans the family home; in the Terminator movie series, robots are used to fight wars in the future. Using robots to help us in our daily lives once seemed a far-fetched notion, but now we’re automating everything from our cars to our TVs. However, when it comes to getting financial advice from machines, is South Africa ready?

The ability to get financial advice from a robo-advice platform is possible – Itransact recently launched ItransactGO, an automated investment platform that is simple to use. Through the ItransactGO website, you get asked a series of questions about, among other things, your investment goals, your appetite for risk and what investments you prefer, and the robo-advice platform spits out a recommended batch of exchange-traded funds, and reveals whether this basket and the timeline you chose would be able to meet your goal.

You can adjust your timeline, risk and the amount you save accordingly until you meet your savings goal.

Lance Solms, the head of Itransact, says: “Once it understands your profile, it will look across all the asset classes like cash, bonds, property, domestic and offshore equities – comprising more than 50 low-cost exchange-traded funds for the most efficient mix – and then combine them in such a way as to form a portfolio that will best suit an investor’s investment goal.

“It will not favour one asset manager or fund over another – it will only pick the best funds for investors. It will automatically rebalance your portfolio so that you never have to worry about the mix of assets you have chosen.”

ItransactGO is different because it is independent – there are no ties to a particular fund management house, such as Allan Gray or Investec. This, according to Solms, is one of the reasons robo-advice platforms have been met with scepticism.

Most robo-advice platforms offer a particular “house” view, and there are lots of asset management firms and banks that have an element of “robo-advice” bolted into their websites.

Advocates of robo-advice question the scepticism that investors attach to the concept. They argue that many South African banks are already automating their services, developing apps and discouraging customers, by way of higher fees, from walking into branches or using the call centres.

Getting advice from “machines”, whether through an app, chatbot or robo-advice platform, is just the follow-on from this, and hybrid offerings also exist.

With some firms, you can already answer a series of questions through their website, submit your risk profile, and the respective fund house or bank will provide you with a list of recommended products – its own products, of course. And this will be followed by a call centre agent offering advice or a visit from a financial adviser.

Are robots better?

There are arguments for and against choosing to invest with active fund managers. Some believe that a person and his or her chosen robo-advice platform could do much better than a fund manager picking companies or other funds to invest in.

According to results published by ProfileData (FE Analytics) and Morningstar, approximately 70% of fund managers who invest in equities underperformed the market over one, three, five and 10 years, suggesting that many investors end up in funds or portfolios that do not suit or meet their investment goals.

So why aren’t we all using robo-advice platforms? Despite the underperformance of fund managers, South Africans haven’t lost their love for them or for the financial adviser. The other reason independent robo-advice platforms haven’t quite taken off yet is because they are quite expensive to build and maintain.

Eugene Maree, a director of Wealthport, says: “Client acquisition cost is high. You have a lot of advertising and
brand costs.”

But the fund management houses don’t have the same financial constraints, and their marketing budgets are high enough to keep their businesses top of mind.

Will your financial adviser be terminated?

Two of the main issues that people face with the fund management industry are cost and trust.

According to a survey conducted by 10X Investments, people don’t trust the financial services industry.

Referring in particular to robo-advice platforms that are transparent about their costings and allow for people to rate and comment on the services offered, Steven Nathan, CEO of 10X Investments, says: “The trust and governance in the industry is missing as people aren’t seeing exactly what they are buying – the cost of it – and there isn’t transparent communication. But if you put something online that anyone can look at and it’s peer reviewed, then you can start to build trust.”

But this won’t spell the end for financial advisers entirely. Interacting with robots – be they chatbots, or websites backed by fancy algorithms that can spit out a number and fund recommendations – appears to be a generational thing for now.

Wynand Smit, CEO of contact centre solutions and optimisation company Inovo, says: “By 2025, 75% of people will be Generation Y and only 12.6% prefer not to use a phone, so their engagement is through phones and social media. So it’s also driven by their needs.”

Nathan says: “People with larger amounts of money and who are older would still want the human engagement. Advisers still play an important role in they get people to save. If there are no advisers, you’d rely on everyone proactively going online and doing it themselves. So I think there is role for both.”

While the financial advisers still have the older generations and those who have more complex goals and portfolios on their side, they would be doing themselves a disservice if they ignored or rejected robo-advice platforms all together.

Maree sees no reason financial advisers couldn’t adapt their business to accommodate robo-advice platforms. He points out that most financial advisers put their client’s information into fancy budget calculators and other tools anyway.

“If financial advisers saw it [robo-advice] as an enabler rather than a competitor, robo-advice would work. Where good advice is given, robo-advice won’t be a threat.”

In the US, Betterment and Wealthfront offer automated investment services to clients, and international bank HSBC is also throwing its weight behind the movement.

To survive, some companies are offering a mix of robo-advice and advice from advisers, but many commentators believe that robo-advice is the way of the future.

The good news is that it should be cheaper and will help to provide financial advice to the masses.

“It’s more about how tech can help people make better investment decisions. It’s very hard for people to get advice as you need to have a certain number of assets [usually more than R1 million] before an adviser, who has the time and expertise, will come and see you,” says Nathan.

With such benefits, it’s only a matter of time before South Africans get into the swing of things.

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November 19 2017