Robots make investing better for Australians
Traditional investing sucks for most people.
Good-quality financial advice is not available to the vast majority of Australians. Very few have access to financial advice, and if they do, it tends to be later in life and closer to retirement. It’s a similar situation with investing.
Many Australians want to start, but find it too overwhelming and difficult to understand. And if they choose to pay someone else to invest for them (i.e. a traditional managed fund), the fees and minimum investment amount can be much higher than they can afford.
Because of these accessibility and financial literacy issues, many Australians delay investing and keep their hard-earned savings in a high interest savings account, thinking they’re at least earning a decent amount of interest.
This isn’t actually the case. Data going back to 1900 suggests that once you account for inflation and tax, savings accounts have a real rate of return of 0.7% p.a. over the 116 year period.
Robo-advisors solve this.
What is robo-advice?
Robo-advice is a form of automated investment service that is delivered online rather than through the traditional method of human-to-human interaction between a financial planner and a client.
Robo-advice reduces barriers in terms of accessibility and lowers barriers in terms of complexity. This allows more Australians to gain access to financial advice earlier on in life.
How does robo-advice work?
Most robo advisors will ask you some questions to determine your current financial situation and risk profile. The risk profile is used to create a recommended investment portfolio for you.
From here, it has the ability monitor your portfolio 24 X 7 and manage it so it stays within its target risk/return profile. This is called rebalancing.
They also use advanced simulation techniques to show you how your portfolio is likely to perform over the long-term and suggest how much you should contribute regularly to reach your financial goals.
The core portfolio construction technology behind robo-advisors has been used by large institutional investors for many years. Prior to robo-advice, this technology was only available to large investors, as it was expensive and involved many middle layers.
In Australia, robo-advisors are subject to the same regulatory standard as traditional financial advisors and are required to act in the best interests of their clients when providing personal advice.
Why robo-advice is better than traditional investing methods
One of the key aspects of the technology is the ability to take the heat and the emotion out of investing and stick to certain well-constructed rules. Algorithms don’t act based on sentiment or fear.
Traditional financial planning industry in Australia has been riddled with scandals involving biased advice due to perverse incentives and commissions offered to advisors to recommend high risk and opaque products. Unlike human financial advisors who can have different biases, both known and unknown, robo-advice algorithms are built on well tested frameworks which are applied consistently and are transparent
Robo-advice algorithms also have the ability to constantly monitor your portfolio versus traditional investing where portfolio reviews are typically carried out six monthly or annually etc. The algorithms will only trade or rebalance when it is appropriate to do so based on a disciplined framework.
The future of robots in the financial services
Robots already have the ability to manage your investments, search for the best mortgages, find the highest interest rate on your cash account, look at your spending habits and remind you to pay bills. The future is where all these services are brought together to create your very own virtual financial assistant.
By using a full picture of our assets, liabilities and spending patterns, robo-advisors can use this information to provide a lot more value to customers than what has been possible so far. For example, algorithms can make recommendations on how much to save each month based on your forecast expenses and automatically invest your savings based on your financial goals.
Algorithms also have the ability to analyse thousands of transactions in seconds or search through hundreds of different financial products to find the best one for a given criteria at very little cost.
Watch this space.
About Clover
At Clover, we believe that investing should be available for all Australians. We’re keen to help everyday Australians understand and feel more empowered about their money.
Our portfolios are designed using Exchange Traded Funds (ETFs) carefully selected for low management fees and high diversification. They hold a mix of Australian Shares, Global Shares, Property, Fixed Income (Bonds) and Cash.
- No sneaky conditions
- Low monthly fees
- Evidence-based investment strategy — no hot stocks or wild speculation
- Socially responsible options for all portfolios
- Personal financial advice — you can speak to a real person at any stage
- Investments held in your name at every stage
- Monitored and rebalanced when required
To learn more about Clover, visit us at clover.com.au or check out our financial health check. It’s a free personalised report on how much you should spend, save, stash for emergencies and whether investing can help you grow your wealth.
