The notion of entrusting computers with typically human tasks isn’t new.
We’ve seen dextrous surgical robots become a part of the fabric of modern medicine, reducing the impacts of human fallibility in the operating room. Their hands don’t tremor, their stitches are more uniform, and they can perform tedious tasks to free up surgeons for more important duties.
You might trust an automated bot to suture a wound or cut out a tumour. But would you trust a robot with your investments?
What is robo-advice?
It was the autumn of 2002. A Wall Street darling, Enron, had just faced a dizzying fall after reaching dramatic heights.
The energy trader had gone from being considered one of the most successful companies of the late 20th century, to the subject of an investigation that would see it grind to a halt.
Wall Street was shaken to its core.
Off the back of this, 2002 marked the first time the term “robo-adviser” was ever used, coined by Richard J. Koreto as the only (digital) hand investors may have to hold in a new world of financial anxiety.
2008 saw robo-advice first offered by startups following the global financial crisis, and is now used by a wide range of global financial institutions.
The combination of advancing technology, globalisation, jaded investors post-GFC and dwindling trust in financial institutions has created what could be considered a perfect storm for significant digital disruption to the finance industry.
Robo-advice is the automation of online investment management. It provides algorithm-based portfolio management advice and bypasses traditional bricks-and-mortar advice from financial advisers.
“Just 20 per cent of Australians seek personal financial advice”
Robo-advice typically uses passive investments like ETFs to construct portfolios; they’re often diversified, low-cost, and relatively safe, as well as being simple to use and easy to implement into a modern portfolio.
As such, financial advice is now not simply just for high-net-worth individuals, with less need for sophisticated human advice that often bears a commensurate price tag.
Robo-advice in Australia
According to corporate watchdog ASIC in 2019, just 20 per cent of Australians seek personal financial advice.
That’s a point worth reiterating: 80 per cent of Australians are unadvised. Furthermore, the same report showed that 76% of Australians don’t trust the financial services industry.
ASIC believes digital advice has the potential to be a “convenient and low-cost option for retail clients who may not otherwise seek advice”, in support of a “healthy and robust digital advice market”.
“The provision of digital advice has grown rapidly in Australia since 2014,” it says, “with a number of startup Australian Financial Services Licensees (AFSLs) and existing AFSLs developing digital advice models. We expect this growth to continue.”
How does robo-advice work?
The process of receiving advice from a robo-adviser is not dissimilar to human advice. After filling out a questionnaire providing your personal information, investment goals and overall risk tolerance, a robo-adviser will create an individualised portfolio for you along with a Statement of Advice (SOA).
The statement explains its recommendations and other key information with your robo-adviser then managing your portfolio; rebalancing it when necessary, and executing trades.
So can you trust a robot?
Robo-advisers are regulated by ASIC in Australia and must have both a financial services licence and a fiduciary duty to act in the best interests of their clients.
Automation aside, real experts are still operating behind the scenes.
Among some of Australia’s fastest-growing and largest robo-advice services, both Sixpark and Stockspot have managed to combine the best of sophisticated investing with automation.
Such services act as a reminder that while robo-advice is built on a foundation of automation, there remains an important human element that drives investment advice—robots may be on the rise, but humans aren’t going anywhere.
Watch this space for our upcoming deep-dive into robo-advice with Chris Brycki, founder and CEO of Stockspot, and Pat Garrett, co-founder and co-CEO of Six Park.