Robo versus human advisers

Our local financial services industry has embraced robo-advising, with the likes of Sygnia, Sanlam and ABSA having taken their online investment platforms to market. The concept of robo-advice is understandably divisive, with naysayers on the one hand believing that consumers aren’t ready to embrace non-human advice, while advocates for the technology believe it plays a pivotal role in 4IR. Although South African companies have been slower to embrace the trend, the pace at which robo-advice is being rolled out is increasing and we now have some sophisticated robo-adviser platforms available locally.

What is robo-advice?

In a nutshell, robo-advice is an automated, online investing service that allows investors to invest cost-effectively, in their own time and with very little administrative burden. With very few barriers to entry, investors are able to go online, complete a questionnaire and set their own parameters for risk, time horizon and goals. The online platform is supported by complicated financial algorithms that choose the most appropriate investment opportunity based on the information that has been inputted. A robo-adviser is therefore actually computer software that performs a digital analysis of your age, propensity for risk, retirement goals, investment timeline, capability and preferences. After completing your online questionnaire, the robo-advice software analyses your data and ‘recommends’ an investment portfolio, with mechanisms built in which allow you to adjust your timeline, risk and investment amounts. Typically, robo-advisers, use a blend of low-cost passive investment strategies, such as ETFs, together with advanced digital algorithms to help investors achieve a stated goal.

What is the scope of robo-advice?

There is ongoing debate as to whether robo-advice constitutes advice or product. The Financial Services Conduct Authority website defines robo-advice as ‘the furnishing of advice through an electronic medium that uses algorithms and technology without the direct involvement of a natural person’ which suggests that it falls within the ambit of advice. However, most robo-adviser services are limited to providing portfolio management advice on an online platform and, as such, could be considered to be offering a product. It could be argued that a robo-adviser is not actually an adviser, but rather financial software that generates a result based on inputted information. With its primary focus being on calculating an investment portfolio for each user based on his personal preferences, it does not address other critical areas of financial planning such as tax and estate planning, budgeting and cashflow, risk protection and retirement planning. As such, robo-advisers are best suited for tech-savvy individuals with uncomplicated portfolios. The more complex your financial situation, the more likely you are to approach a professional to assist with your needs.

What are its advantages?

Besides for the convenience factor of being able to invest quickly and in your own time, robo-advice can be a cost-effective way to invest if you know what you are paying for and what you can expect in return. With the platform running on tried-and-tested algorithms, there is also very little room for human error or finger trouble. There are very few barriers to entry in terms of investment amounts or minimum monthly premiums, making it an attractive option for first-time investors with lower levels of income. It is particularly appealing to Millennials and digital natives who are already comfortable trusting software such as Uber, Airbnb and banking apps. Young professionals with lower net worth and levels of income who feel underserviced and overlooked by the financial services industry are likely to find robo-advice an attractive solution.

What robo-advisers cannot do

With most robo-advising platforms being limited to investing, key areas of financial planning remain unaddressed by this type of technology. As a person’s circumstances become more complex, the need for a human financial adviser will generally grow. Once size does not fit all when it comes to financial advice, and a holistic financial plan should ideally cover the full spectrum of financial planning including risk, retirement, estate planning, tax planning, cashflow, debt, budgeting and business planning. As more and more fee-based financial advisers enter the fray, more consumers understand the benefit of having a personal financial ‘touchstone’ on speed dial to bounce any financial decisions off at no additional cost. Robo-advice, being what it is, is devoid of emotion and lacks the intimacy and trust that is often forged between financial adviser and client. Driven by algorithms, robo-advice can only work within the boundaries of the data that has been captured and lacks deeper insight into a client’s lifestyle goals. It also cannot take into consideration human emotions and behavioural finance, with many believing that the generic online questionnaires may be too simplistic to evaluate a client’s more personal needs and objectives.

As robo-advisers grow alongside professional fee-based advisers, it is likely that each will carve out a niche depending on the type of advice that is required by the consumer. Adopting a truly client-centric approach to financial planning means that consumers will seek out good financial planning advice in the style that best suits their needs. At the end of the day, consumers will vote with their feet and follow the path that leads to best advice.

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