Technology is forever changing the way we do business. Just consider how Uber transformed the taxi industry and the revolution Airbnb caused in the hotel sector. Will robo-advisors do the same for financial advice? My name is Ingé Lamprecht and to discuss this topic I’m joined by the owner of The Wealth Room and certified financial planner, Grant van Zyl.
INGÉ LAMPRECHT: Grant, it seems that the emergence of robo-advisors is a significant development in the US and the UK. This brings to mind images of little white robots standing in place of our financial advisors. Perhaps you can start by explaining what robo-advisors are?
GRANT VAN ZYL: Robo-advisors is pretty much an Internet-based system. It has been developed by certain investment houses or asset management companies to make their offering available directly to the public, with very little administration and with low costs involved in the bigger picture, and what they’re trying to do, is to remove the so-called “middle man”.
The systems that they have built would normally ask you a set of questions to come up with a suitable risk profile for your investment needs and once you have established the sort of risk profile, it then spits out a recommended investment strategy or solution based on your risk profile. Most investment strategies are linked to what we call passive or index-tracking investments, which means that the costs are really low at the end of the day, and if, like you said in your question, you look at the First World sort of countries, your robo-advisors are definitely popping up more and more all over the show.
IL: What are the benefits for ordinary investors?
GVZ: So, if you look at some of the benefits for ordinary investors, I mean there’s quite an extensive list, it eliminates pressure to invest, directly or straight away, if you’re dealing with the financial planner, so it takes away that pressure and that urgency to make a decision straight away.
It also gives you a really good understanding of what you’re paying, so there’s no real hidden costs when it comes to investing in these sort of robo-advisor strategies or solutions. The investment choice is pretty straight forward, it’s very simple, some might say a little bit too simple, but that is if you’re struggling to understand investment and you want to really get things brought down to layman’s terms, that’s a great advantage.
We’ve already spoken about this before, it’s a really cost effective solution if you’re very sensitive towards fees, and it also gives you a really low level of financial planning, which suits the requirements for many investors, particularly first-time investors and young savers who do not need life insurance and disability and estate planning advice and all those sort of things.
IL: Can they really replace a real financial advisor?
GVZ: Well, robo-advisors might not be the complete answer at this point for a number of reasons. They are unlikely to provide a personal touch or reassurance that human contact can provide. Not all investors will trust a computer ahead of a person with whom they can have a trust relationship, and especially the older generation, they’ll battle with that sort of mind shift or philosophy.
Then also, the problem with the robo-advisor is that it is extremely limited to the kind of advice that it can give you because they have set portfolios and then it basically will give you one of those portfolios, so when it comes to life insurance and any other financial planning situation, it’s not going to be able to help you with that.
It also is very limited when it comes to problem-solving, because obviously they have set issues and set investment philosophies and that’s what they’ll stick to.
But in all circumstances, I mean you can see that the value of good financial planning, and I’m going to reiterate good financial planning, I don’t think a robo-advisor will ever be able to take that position.
IL: So is there not a risk then that people at the lower end of the market will be subjected to a cookie-cutter type approach to their financial planning?
GVZ: I think you are 100% spot-on with that observation. You’re definitely going to have that situation where the robo-advisors – you need to understand from the development perspective – they’ve basically got a set of algorithms that they run in the background and as you answer the questions, they’ll give you a score, and let’s say the score is from 1 to 50. If you score 1 to 10, you will most probably be ranked as a low risk profile investor and then they’ll give you, let’s say strategy 1, which is a cautious strategy.
But if you go and score differently to the different tiers, you will then be placed into the different strategies. So if you say you scored 11 and you now get moved to the next strategy, it’s very difficult to give proper advice when it comes to risk profiling like that, when you are based on algorithm and mathematics instead of sitting down with someone saying, listen, this is the situation, which risk are you prepared to take at the end of the day. So the cookie-cut type of approach from a robo-advisor, that’s their whole methodology and their concept on how they want to give financial planning.
IL: This model may have a unique role to play in a country where so many people do not know how to access financial advice, and even if they do, many find the idea of talking to a financial advisor daunting because they worry they don’t know enough or earn enough. Do you believe that robo-advisors could breach this divide and provide really low-cost financial education to South Africans?
GVZ: I think in some cases it definitely might be able to do that. However, the big target market that is in this low financial literacy situation is the audience that is not really going to be able to understand financials or financial planning or investment planning at all. So when it comes to the robo-advisor, you have to have a certain level of investment knowledge to be able to actually go and address one of these sorts of programmes.
So I think in some cases when it comes to the tech-savvy sort of guys, it’s definitely going to breach a gap and then it will help them, but with the audience where there is little financial literacy, I think it’s just going to be something that they can’t really look at because you do need a certain level of understanding to be able to approach a robo-advisor at the end of the day.
IL: Is the offering mainstream yet? Who is providing the service in South Africa?
GVZ: Sure, there are a number of players out there. The only problem in South Africa is the economy of scale is not like that of the US where you’ve got 350 million citizens that obviously can use the scale, but there are the likes of Satrix, there’s 22seven, I think there’s Invest Online, SmartRand, MoneySmart, and then Sygnia, I heard is also launching something by May 2016, so there are a number of guys out there. I just don’t know how much, or how established they are at this very point.
IL: Grant van Zyl is the owner of The Wealth Room, and a certified financial planner based in Somerset West.
– The Investor