Does it have to be either/or?
In case you hadn’t noticed, there is a noisy revolution going on in the investment environment and it’s all about ‘robo advisors’ taking over from flesh-and-blood advisors (the origin of the phrase pound of flesh). As with all dastardly plans this started in the States (JK). Robo advisors are nothing more than computer programs, strings of ‘algos’ that take the information you feed them and spit out a recommendation and lods of followup reports, and very kindly, don’t charge you for it – providing you use their platform of course. Why on earth would you want to do that? Fees of course. Cutting out the middleman is the quickest way to dump a bunch of fees.The robo advisor revolution is just a small part of the rebellion against bloated advisory and investment fees – and it is coming to South Africa. Post 2008 that wunch of bankers, investment bankers, have not been popular. They were responsible for lumping hoards of bad debt into one pretty little package, getting it rated A+ and flogging it to the unsuspecting public by way of sub-prime loans. Fees that exceeded the meagre returns the market was offering stuck in the craw of the investing public and led to this revolution.
The first signs of this change was the rapid replacement of traditional Unit Trusts (called Mutual Funds in the States) by ETFs (Exchange Traded funds) and ‘trackers’. This started off with ‘retail investors’ (we, the people…) buying these directly, and they are now popping up on traditional investment platforms. If you aren’t sure what these are you can read my blogs HERE and HERE. This is ‘passive’ investing. Investment done by a cold-blooded computer, supervised by an even colder blooded asset manager. This is way less work than an asset manager doing it all by himself – an ‘active’ asset manager. Most of the costs associated with ETFs and trackers are admin, software or buy-and-sell costs. Obviously with active asset managers you have to add payments on the Ferrari and beach house in Clifton. There is also yet another layer of active asset managers who take pre-existing unit trusts (that they aren’t smart enough to make themselves) and make another unit trust (layers upon layers of fees). If you see FOF or Fund of Funds tacked onto a unit trust take a look at the fees – then run.
Having eroded the fee base of asset managers, fees paid to financial advisors was the obvious next target. To be fair, all robo advisors did was take the same information that inexperienced or lazy financial advisors used to stick into a computer program to churn out your investment recommendation without another thought and turned it into a DIY model. The catch is that if you want to use the robo-advisor you usually have to invest on the robo-advisor platform – and those are usually traditional unit trusts and feeding those ‘active’ fees to asset managers (but, to be fair, as economies of scale kick in those fees are also coming down.)
The notion that robo advisors will take over from real advisors makes a number of assumptions:
- A dozen questions is enough to assess the investor’s objectives, market sophistication and risk appetite.
- The average investor knows exactly what he wants and how it should be structured
- Investors have a good knowledge and understanding of the market, risk and return, asset allocation and concepts like standard deviation.
- The investor’s entire wealth portfolio is properly balanced (savings, risk mitigation, obligations, retirement, bucket list, legacy).
- The right information is being input into the ‘robo-advisor’. Garbage-in-garbage-out. We fool ourselves all the time, never more so than when it comes to money. It isn’t just cold-hard-cash but sucks in and wraps up all sorts of emotion and ego that a computer can’t even start to understand
The value of a real advisor or financial planner is that they can use their understanding of a client’s entire wealth portfolio and behavioural finance to structure a holistic plan, flexible enough to change as the client grows. Robo advisors pose the biggest threat to investment specialists who just invest the ‘leftovers’ rather than put the complete financial plan together and determine what those ‘leftovers’ are. Wealth is what is left after you have consumed your income, part of that consumption has to go into protecting your long term wealth accumulation and obligations. Good planners and advisors have been using robo-advisors to help with the complicated projections and models, so that isn’t new. Along with ‘direct’ selling of insurance policies this is just another way to cut out the middle-man. For the masses that can’t afford to pay for financial advice, robo advisors are going to be a huge help – but you get what you (don’t) pay for.
Action: Get what you pay for. Your wealth and risk portfolio needs to be properly structured and balanced by a professional and monitored frequently. Are passive funds being considered to bring down the total cost of your investments? Are you being stuck in early termination penalty products (that only benefit the broker, never you)?
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Author Dawn Ridler ©