In years gone by the products available to save and invest were very limited for most of us. Unless you had the means to afford a financial adviser, saving (and investing) was limited to putting your money in a bank account until you had enough to buy an investment property.
Technology has changed this giving the average punter access to investment options that simply weren’t on the table just 5 years ago.
Robo-advice is part of this technological wave and in this post, we will take an in depth look at exactly what robo-advice is and how robo-advice works. We also take a look at some of their shortcomings and some other potential options out there for you.
What is Robo-Advice?
Robo-Advice is investment advice that is delivered digitally rather than by a human financial adviser. Robo-advisers deliver robo-advice – think of them as digital money managers, they invest your money and in return you pay them a fee – this fee is a % of the money you give them.
Which Robo-Advisers Operate in Australia?
As per our in-depth review of robo-advisers in Australia, here is a table of these companies and what each of them will charge you:
|<$10,000||$10,000 - $49,999||$50,000 - $99,999||$100,00-$199,999||$200,000 - $499,999|
Where Do They Invest Your Money?
Robo-advisers will have portfolios that they invest your money in, each portfolio will have a combination of Exchange Traded Funds (ETFs). ETFs are funds that mimic the performance of an index or asset class – for example the VAS.AU is a very popular Australian Shares ETF – it mimics the performance of an index called the S&P300 which contains the biggest 300 shares in Australia.
Each portfolio will invest a % of your money in these ETFs – below is the example of where your money will be invested with Raiz’s Moderately Aggressive Portfolio:
|Asset Class||ETF Code||Allocation|
|Australian Govt .Bonds||IAF.AU||3%|
|Autralian Corp. Bonds||RCB.AU||21%|
|Australian Money Market||AAA.AU||3%|
Active vs Passive (index) Investing (and Why Warren Buffett Loves Robo-Advice.)
Active investing involves trying to use knowledge and skill to pick winners and losers in the market. This is how most traditional fund managers invest your money. This is the opposite to passive (or index) investing where buying and selling happens a lot less frequently and the strategy involves mimicking the returns of indexes – all robo-advice is based off this strategy.
Active investing may sound like it would perform better however, there is a lot of evidence to suggest the contrary. Most of this under performance is a result of the comparatively high fees of active managed funds and the sheer difficulty in consistently picking winning investment ideas.
Warren Buffet is a big fan of the strategy behind robo-advice – in his 2013 letter to shareholders he said his advice (for his own wealth) would be to “put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Buffett also won a $2.2m on a bet that an S&P index fund would outperform a bunch of actively managed funds – he won the bet…comfortably.
Can’t I Just Buy the ETFs myself?
If passive investing is as easy as buying ETFs it is worth analysing some of the value add behind robo-advice.
Robo-advisers will advise which portfolio you should invest in based on your risk profile. They determine your risk profile based on your answers to approximately half a dozen questions (i.e age, income, investment experience etc). Here is a sample of Quiet Growth’s risk tolerance output:
Based on this, Quiet Growth would recommend you invest in their higher risk tolerance portfolio containing 82% shares, 14% bonds and 4% gold via ~6-7 ETFs.
There are now over 150 ETFs listed on the ASX across over half a dozen asset types – robo-advisers will select the ones they believe to be the best.
Set and Forget
Robo-advisers can also help with re-balancing of your portfolio – this means that if you want to make ongoing investment they will make sure that these contributions are invested inline with the portfolio you selected. The alternative would be having to buy a bunch of different ETFs each time you wanted to invest more money.
Why Investing is so Important
It’s worth taking a moment and considering why having your money in the market is, over the long term, much more beneficial than just having it in a bank account. Below is a chart that compares a bank account earning 0.5% above the prevailing cash rate (compounding daily) vs having it in an ETF that mimics the Australian equity market (and reinvesting dividends). Both investments start with $10,000 and invest $100 per month – a total investment of $32,220 over 18 years:
Source: IRESS, RBA
Your investment today is worth just shy of $100,000 in Australian equities – 70% more than keeping it in a bank account.
It’s important to realise that there are time periods where markets will go down so it’s crucial to have a long investment timeframe, particularly if you are investing just in equities. A benefit of robo-advice is a portfolio is selected that matches your time-frame of investing.
More Holistic Option?
While robo-advice certainly has some great benefits, it does have its limitations.
Robo-advisers don’t get a complete picture of your financial situation and therefore won’t tell you alternate things you can do with your money that may leave you in a better place financially. These can be simple things like paying off your credit card, paying down you home loan, putting more money in super or putting your savings in an offset account.
Robo-advice is delivered solely off the half dozen questions you answer – it doesn’t consider many other important factors in your life when they give advice. This means that the advice is unlikey to be tailored enough to your specific situation.
Sometimes you might want to have a conversation with an adviser to understand more about your personal situation or get further advice – robo-advisers cannot help you in this regard.
At Plenty we get a complete picture of your wealth which means our advice is tailored to your situation and covers far more than just your investments. We also give the ability to have one on one (digital) meetings with advisers. It’s free to get started – check out our investment advice.
Josh is the co-founder of Plenty. Along with being a mortgage broker, he spent 5 years in banking and has an honours in Finance from UNSW. He loves all things tech and finance.
The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.