Is online wealth advice a reality?
Online wealth advice is not a ‘full-service’ offer like face-to-face advice, but it can provide tailored strategic asset allocation and investment guidance without the complexity or cost of the complete financial planning package.
Financial advice in Australia has not been static. Fuelled by the superannuation guarantee system, the industry provides a wide range of services to investors; strategic advice, insurance, investment management, portfolio reporting, social security guidance, assistance navigating the superannuation and retirement systems, etc. The list goes on.
Unfortunately the infrastructure required to support financial planning services and regulation has grown unwieldy and costly. Most planners rely on cumbersome administration systems. A typical large practice financial planner is locked into a single or at best two or three investment platforms. This has reduced flexibility, and increased the cost of stand-alone investment advice.
A key part of the financial planning offer – investment advice – has become less tailored over the last 10 years. The need for better compliance, scalability and fee harvesting has meant that investors are often recommended benchmark-hugging model portfolios such as fund-of-fund offers, typically manufactured internally. The investment advice part of financial advice has become commoditised, making it less important as part of the overall financial advice value proposition.
What is the focus of ‘direct wealth’ or ‘robo’ advice?
Direct wealth is effectively a ‘cut out’ of the financial planning offer. It is not a ‘full-service’ offer, but concentrates on tailored strategic asset allocation and investment advice, without the complexity or cost of the complete financial planning administration and infrastructure.
In North America and the UK, direct investment advice is thriving. In these markets there is no problem with segregating investment advice from the broader financial advice offer.
There are three other important drivers of the growth of direct advice.
First, fees are coming down both in Australia and globally. But the cost of the complex investment platforms that Australian advisers are using means that these fees are not coming down quickly enough.
Second, smart phones have now been around for many years and we love them. They are always with us. For most Australians, young and old, this has become their primary conduit to information, purchasing of goods and services and interaction with friends and associates. Paper communication, talking face to face with people and even emails, are being replaced. This is a challenge for the traditional financial planning models that still seem to require endless paper and face-to-face meetings. In contrast, direct investment advice is easily completed using just a smartphone.
Third, we now have a better understanding of how investors think. Behavioural finance has alerted us to mental accounting where investors tend to think in ‘buckets’, however illogical that is. Unfortunately ‘bucket’ investing doesn’t quite fit with holistic financial advice – where there is usually one investment solution across a client’s entire portfolio.
This is the perfect environment for online direct wealth solutions.
More people need advice but are not willing to pay for it
As an example, take an investor with an SMSF. They have already paid for the superannuation framework and typically choose their own investments without the help of an adviser. This has worked well until recently; relatively accessible investments like term deposits and Australian shares have delivered good returns. Now, these self-directed investors are noticing that global markets and property have outperformed, while deposit returns have reduced dramatically and Australian shares have borne the brunt of the commodity market downturn.
Many SMSF self-directed investors have been hurt by their lack of diversification. They need advice about non-Australian markets and strategic asset allocation but are loathe to pay a financial adviser for the administration and strategic advice they don’t need.
The good news for SMSFs is that direct wealth or ‘robo’ advice can offer online tailored strategic asset allocation and security selection advice quickly, efficiently and at low cost. The trustee can receive a robust diversified portfolio in less than 10 minutes, using their phone or home computer. There is no need to pay for the extras that traditional financial advice provides (accepting that many other investors need these and are willing to pay for them) such as retirement strategy, budgeting, face-to-face meetings, costly administration and all that paper work.
Then there is the forgotten investor – perhaps an individual who has accumulated savings, received an inheritance or downsized their house. The money is not in superannuation, which is well catered for by financial advisers. This investor’s easily accessible choices are limited. They can put it into the bank, buy an investment property, buy some Australian shares or find a financial planner. The difficulty is that the financial planner will want to look at all of the investor’s portfolio in a holistic solution. Clearly, there is a role for such a broad offer, but many investors only want the money invested efficiently, not complete the work necessary for a 70 page Statement of Advice.
Direct wealth advice is the solution. Tailored strategic asset allocation and investment advice using online risk profiling includes quickly opening both a bank account and brokerage account, a process which can take many weeks with a financial adviser.
Direct investment advice is also more flexible for ‘bucket’ investing. Let’s assume that the investor splits their investment money into two buckets. The first bucket is a short term investment (say, 18 months), and the second bucket is more of a long term investment, say five years. The investor can open two accounts in the direct wealth channel, and simply alter the time frame for each account. This will produce tailored strategic asset allocation and investments to suit both buckets.
The other benefit of direct wealth advice is that investors have a transparent portfolio rather than the opaqueness of a multi sector balanced fund with many underlying managers. Using any device, investors can call up reports, see daily updates in portfolio value, redeem and invest additional funds. Direct wealth ‘robo’ advice is investment advice brought into the reality of our digital world.
About the author
Maggie Callinan is Chief Investment Officer of Indeksio, due to release in Australia in Q3/2015.
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