Roboadvice: Consumers can be overly optimistic

 Roboadvice (automated investment management) is a popular catchword at the moment. From Stockspot to NAB’s Prosper to YBR’s Guru, it’s almost a certainty that the market will soon be flooded with a large number of general advice, impersonal robo tools.

Indeed, ASIC recently announced that it has received a number of AFS licence applications from businesses intending to provide digital advice (commonly known as robo-advice), with most applications coming from existing license holders. In response it has established a separate internal digital advice taskforce—the Robo-advice taskforce.

Is Robo-advice the answer?

Yellow Brick Road executive chairman Mark Bouris claims that Australians are sick and tired of an industry that cannot provide them simple, affordable financial check-ups and guidance, regardless of income and assets.

“People want control,” said Mr Bouris. “What if you want to take two years off work? What will this mean for your future? Perhaps you want to buy a car, extend a loan to your kids or cover university costs. Yellow Brick Road has listened and we want Australians to take control of their financial future.

“GURU allows the user to pull levers to manipulate their money to discover how they could achieve their dreams. “GURU draws on the best of robo-advice technology and uses tens of thousands of calculations to let you see your future, as it stands today. Then it puts the control in your hands to discover the best path forward. It’s an empowering and sobering session.”

Adrian Frinsdorf, Director at William Buck, sounds a note of roboadvice caution. We caught up for a quick Q&A:

Q: Many Australians see comprehensive financial advice as being cost-prohibitive. But is it really?

A: Many clients do not need comprehensive advice and paying for something that you do not need is extremely expensive so it is difficult to put a percentage  number on the proportion that could benefit from comprehensive advice.

Many clients will need specific advice during their life cycle and this specific advice may relate to issues that they have. Examples of this may include purchasing a house, choosing superannuation funds, obtaining insurance, setting up a business and other specific issues.  The advice industry does have some specialisation but there needs to be greater education about the differences.

Within financial advice there are quality product specialists, such as insurance advisers,  mortgage advisers and stockbrokers and they do charge differently.   The problem seems to be that all advisers seem to look the same to the consumer so they do not know who to trust for comprehensive advice. Many product specialists offer comprehensive advice and this is where difficulties tend to emerge, the comprehensive advice they offer is normally biased towards achieving a product outcome.

Q: Could free robo advice models  be used as a pre-planning tool?

A: Robo Advice models could be a pre planning tool.   The more educated a client is the better and cheaper advice will become.  If a client has a discussion point this is a really good thing and potentially this can be a talking point with a family member of friend, which will increase awareness.

Q: In your experience, how accurate are consumers in determining their own risk profile?

A: There are chapters written about behavioural finance that would answer this very well. As consumers we can be overly optimistic and may risk questionnaires are badly created, most of them will have target return questions and if you ask any consumer whether they would prefer a 3% or 8% return there is going to be a natural bias towards choosing the 8% return.

There are other questions in relation to market volatility and experience as an investor but they are not equally weighted. Professional judgement needs to be applied and this is almost impossible to do if someone is “self-diagnosing”

What consumers think about roboadvice

In September, investment newsletter Cuffelinks asked readers to complete a roboadvice survey. Of the 102 responses, approximately 82% felt that roboadvice could be successfully offered in Australia, with existing international providers, ETF providers, retail banks and retail and industry super funds the most likely contenders.

Portfolio asset allocation was the most popular expectation of service.

It will be interesting to see what services develop – and stick around – over the next few years.

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