This week's Canny View brings in-depth analysis of robo-advice approaches, its capabilities, due diligence, the importance of the human element, and the key to success with robo-advice.
Robo-advice can most simply be described as digital wealth advisory with web-based platforms leveraging the internet and computer models to offer customised investment allocations to investors.
The initial uptake and interest in robo-advice has come from the "mass-affluent, delegator" market segment, which has traditionally been underserved.
The Mass Affluents are those who've spent a lifetime working to build successful careers and reaching the age of retirement, they have money and control between US$250,000 and US$1m in investable assets.
Wealth management firms have taken a variety of approaches to robo-advice services. Some have launched their own services, others have partnered with providers, and the rest have bought formerly independent players.
In developing a financial plan, wealth advisers assimilate multiple goals, including savings, planned home purchases, retirement, protection needs, and estate planning in proposing investment solutions.
The current robo-advice capabilities are fundamental. In general, they use simple surveys to profile clients and assess their needs.
An asset allocation is proposed, adjusted and implemented. Portfolios are monitored, rebalanced and reported.
All in all, it represents a useful basket of services at an attractive price, but today it won't meet the needs of investors with even moderately complex financial lives.
With FMA's recent announcement, wealth management firms anticipate that competition, innovation, and new technology will dramatically increase robo-advice capabilities soon.
If a wealth management firm has elected to add a robo-adviser, the selection of a robo-adviser is a fiduciary decision and, as such, needs to be made with the same care, prudence, and skills as evaluating any investment product or adviser.
Currently, many global robo-advice platforms aren't fully transparent, with hidden fees paid through volume bonuses and rebates by providers (fund managers and insurers).
Fee transparency with robo-advice is crucial when human advice is moving to full fee transparency with the new Financial Advisers Act in New Zealand.
Firms must ensure that the robo-advice is consistent with their investment philosophy and it meets clients' investment goals and constraints.
While robo-advice capabilities are advancing dramatically, it is believed by many industry experts that personal connections will remain essential for many investors.
There are parts of the client-adviser relationship, such as reassuring clients through challenging markets, persuading clients to act and synthesising different solutions, which should remain the province of a financial adviser for the foreseeable future.
The reality is that many of the robo-advisers are start-up firms, often in the midst of fundraising.
Although many of these issues are difficult to predict, one needs to consider the ongoing viability of the robo-adviser and contemplate the different ways the robo-adviser may evolve in the future.
With this in mind, it is essential to develop a unified client-adviser experience that seamlessly brings together the best of human and robo-advice capabilities.
Understanding where robo-advice can complement and enhance relationships will be key for most full-service wealth management firms.
• Nick Stewart is an authorised financial adviser and executive director of Stewart Financial Group. Stewart Group is a Hawke's Bay-owned and operated independent financial planning firm based in Hastings.
• This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to consider your investment objectives, financial situation, and individual needs. A disclosure statement can be obtained free of charge by calling 0800 878 961.
