Wry & Dry

'Robo' advising and investing - traps for young players

Just as Uber is disrupting taxi owners and drivers, and peer-to-peer lending will disrupt banks, so to Robo advising & investing will disrupt financial planners and fund managers at the lower end of the food chain.

Robo whaaaat?


Robo advising is simply getting a client to complete an online questionnaire about his/ her fiscal circumstances (science), objectives (art) and to assess their 'risk profile' (even more art).  Then the computer spits out the perfect investment portfolio for the client.  And the products in which to invest.  It's sort-of cheap (about 0.5% to 1% p.a. of assets invested, but you gotta read the fine print).  And very simple.  And efficacious.

Well, not really.  There are five clear traps.

1.  What is the qualification of the organisation that is behind the algorithm that decides the asset allocation and investment selection?  And what is the basis of the algorithm?

2.  To whom are you giving your money?  Is there an independent custodian?  Do you have redress if things go pear-shaped?  Can you talk to a human?

3.  How is the investing done?  Most robo-investors use 'passive funds', that is, funds that are not actively managed but rather seek to match a market benchmark of some sort.  The easiest to use are what are known as Exchange Traded Funds (ETFs).  There are good ETFs.  And there are not so good ETFs.  ETFs that replicate an index (synthetic ETFs) might not be okay, as many use derivatives to replicate the price movements of the index.  ETFs that 'duplicate' can be okay (depending on the manager).  And ETFs that back their investment with hard commodities (such as gold) are okay.

4.  Is there a reporting regime that gives you all the necessary reports, including an independent audit certificate, on all of your investments, both separately and agglomeratively?

5.  Are the fees worth it?  Is there full fee disclosure?  W&D logged onto allegedly Australia's leading robo advice website and found that management fees were quoted on a monthly basis, which logically compounds up to an annual fee a lot more than first appears [3].  And that is on top of the investment management fees.

Of course, there is no advice about personal circumstances, such as tax management, estate planning, capital adequacy mapping, etc.  And no tailoring of investments to optimise tax, manage prohibitions or security preferences.

Robo advising/ investing is booming in the US, driven not only by the inability of (a) financial planners to know what they are doing and (b) the investments themselves to add value; but also because most of the providers of robo products are exciting start-up companies.   These companies are cashing in on the negatives of the current regime and the positives that are driving almost every IT start-up in Silicon Valley.  You will hear more of names such as Betterment, Wealthfront and Personal Capital.

Caveat emptor.