For anyone considering automated advice, the obvious question is “How will I benefit from robo advice?”. We provide the answers based on the latest research.
At a broad level, robo advice provides plenty of advantages to Australians looking to build wealth or achieve personal goals. Importantly, robo advice is far more affordable than face to face advice, and therefore a lot more accessible.
According to Adviser Ratings, the average advice fee in 2021 was $4,000, though it can go as high as $12,000. Many Australians simply don’t have the capital needed to justify this sort of cost.
Robo advice on the other hand, with its low upfront capital requirements and extremely low fees, is democratising investing by making it more affordable. Almost anyone can start investing.
What Are the Benefits of Robo Advice?
Understandably, most investors want to know how they can benefit from robo advice. In other words, “What’s in it for me?”.
The reality is that every investor is different, with unique goals and varying sums to invest. But the beauty of robo advice is that it can help all investors in a variety of ways.
Here are three main benefits of robo advice based on the latest research.
1. Improved asset allocation
Deciding where to invest, and how much to invest in different asset classes, can be a real stumbling block for individual investors.
Getting the mix of investments right is important. Russell Investments notes1 “research suggests asset allocation is responsible for more than 85% of an individual’s investment outcome”.
A key advantage of robo advice is that it decides asset allocation based on an investor’s appetite for risk, age, goals and a range of other factors. In other words, robo advice does the hard yards, making complex decisions on behalf of the investor without the biases all humans bring to the table.
The upshot, according to a 2021 US study, is that robo advice “increases investors’ overall risk-adjusted performance, mainly by lowering investors’ portfolio risk”.
Better still, robo advice continues to ensure the investor has an appropriate blend of investments by regular portfolio rebalancing – a simple concept, but something that can be complicated in practice.
2. Investors say robo advice provides substantial portfolio value
In a 2021 study by Vanguard, investors were asked to estimate their average annual returns over the past three years. Those using robo advice estimated their returns to be 24%. Those using a human advisor estimated their returns over the same period to be 15%.
As Vanguard notes, there can be varying reasons for this difference. The report says, “digital-advised investors skew younger and self-report being more aggressive in their investments, which would have led them to higher performance in recent years”.
Nonetheless, if the same question had asked about returns after advisor fees, it’s a fair bet robo advice would still have come out in front – possibly by a lot more.
3. Less effort to invest successfully
Investing can demand time and effort. And in our busy lives most of us would rather chase a soccer ball around the park with kids or grandkids rather than chase the stockmarket.
Research by a US university confirms that investors using robo advice reported decreased effort in managing their portfolios.
As the study observes, the reduction in attention didn’t reflect lack of interest. Investors still regularly logged onto their robo advice account to check the progress of their portfolio. Rather it was the case that “the overall time spent making investment decisions decreases after adopting advice”.
Additional Benefits of Robo Advice
The pluses of robo advice aren’t limited to investment returns. The same Vanguard research mentioned earlier noted that robo advice rated more highly than face to face advice across a number of factors including:
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- Diversification of investments
- Effective tax management – including capital gains tax
- Simplified, cohesive portfolio management, and
- Ability to prevent details or entire accounts from being overlooked.
That is not to say there aren’t benefits from using a face to face advisor. Plenty of investors relish the opportunity to build a relationship, and speak in person with a financial planner. But there is no getting around the fact that the cost of face to face advice is a significant barrier for many Australians.
If you’re not convinced about how robo advice can benefit you as an investor, let’s end with the observations of researchers from Georgetown University and the University of Pennsylvania in the US.
They say robo advice allows investors to “set up customised, diversified portfolios and can give access to other wealth management services previously limited to affluent investors, such as portfolio tax efficiency, cash flow forecasting, and retirement income planning.
The researchers go on to say, “Many (robo advice) services emphasise investment in low-cost index funds, minimal trading, tax efficiency and global diversification – arguably the benchmark for optimal portfolio advice from the empirical finance literature.” As far as report cards go, it doesn’t get much better than that.
Sources
1 https://www.adviserratings.com.au/news/seven-adviser-insights-from-our-yearly-deep-dive-and-why-we-need-you/
2 Rossi, Alberto G. and Utkus, Stephen P., Who Benefits from Robo-advising? Evidence from Machine Learning (March 10, 2020). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3552671
3 https://advisors.vanguard.com/iwe/pdf/ISGHVD.pdf
4 https://gflec.org/wp-content/uploads/2020/09/Rossi-Albert-Draft_9_UTS.pdf?x93521
5 Finder media release: Independent investors: 16.8 million Aussies don’t have a financial advisor or planner, 22 Nov 2022
6 Rossi, Alberto G. and Utkus, Stephen P., Who Benefits from Robo-advising? Evidence from Machine Learning (March 10, 2020). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3552671
