As we head out of the COVID-19 pandemic, it’s worth a look to see how Robo Advice handled one of its most formidable tests.
A 2020 survey by GlobalData found that in the US, the use of Robo Advice increased across all age groups through the pandemic. The number of baby boomers using a Robo Advice service climbed from 7.2% in 2019 to 7.8% in 2020. Among Gen Z investors, 13.6% used Robo Advisers in 2019 – a figure that rose to 16.4% in 2020.
These results are broadly reflected here in Australia. As a guide, InvestSMART saw its funds under management (FUM) double to $246 million by 31 Dec 2020 – and double again to $498 million by 31 Dec 2021.
It’s a similar story for Stockspot, which in early 2022 reported FUM of $600 million, up 89% on early 2021 – and up 170% from two years prior.
The pandemic has changed our mindsets
The uptick in investors using Robo Advice through the pandemic reflects a shift in the way we manage our money. A global survey by tech giant Oracle found COVID-19 has driven higher levels of financial anxiety.
It says, “With so much uncertainty, who and what we trust is changing, with the majority of people now trusting robots more than even themselves to manage finances.”
This is backed up by Oracle’s findings. which show:
- 85% of people believe robots will replace finance professionals
- Seven out of ten (67%) would trust robots more than humans to manage finance
- 59% of people now say they would trust a robot with finances more than themselves
Clearly, this is helping to drive investors’ appetite for digital investment platforms. However, it hasn’t just been about limited ability to have human interaction during the pandemic, or greater trust in technology. The fact is, Robo Advice also delivered on performance through COVID-19.
Strong returns defy the naysayers
All Robo Advisers use broad-based, index-hugging exchange traded funds (ETFs) as the backbone of their portfolios. It’s an approach that some commentators believed would do well in a rising market, but could face limitations in more challenging conditions.
Nonetheless, the results show Robo Advice defied the naysayers. To see how well Robo Advice fared, let’s shine a spotlight on InvestSMART’s Growth portfolio. It offers a blend of Australian and global equities, property and infrastructure plus fixed interest and cash.
As the table below shows, the InvestSMART Growth Portfolio outperformed 806 peer funds over the past 1-, 3- and 5-year periods – with 3-year results being especially relevant to the pandemic.
InvestSMART Growth portfolio – returns to 30 April 2022
Since inception (SI) 24 October 2014. All returns are annualized. Source: InvestSMART
For more of a bird’s eye view of investment performance during the pandemic let’s take a look at the chart below.
It clearly demonstrates how InvestSMART’s Growth Portfolio has outperformed the average of 806 peer funds. The dips were lower for InvestSMART investors – even when the market plunged in early 2020. And the gains were higher as the market recovered.
InvestSMART Growth Portfolio Performance vs average
Growth of $10,000. Source: InvestSMART
Again, we see similar strong performance across the portfolios of Stockspot, which ranged from annual returns averaging 5.1% to 9.7% over the three years to March 2022.
A $60 billion industry
Analysis by Rainmaker shows Robo Advice in Australia has the potential to be a $60 billion market.
Alex Dunnin, executive director of research and compliance at Rainmaker Information, explains the appeal, saying, “Robo advice is becoming an increasingly attractive proposition in Australia as it is a very cost-effective way for retail investors to obtain limited financial advice and be connected with packaged investment solutions.”
Rainmaker adds that the financial adviser sector shake-out we’ve seen since 2019 means that “digitally delivered Robo Advice could rapidly become incredibly important for millions of Australian consumers.”
Long story short, having nailed the pandemic, investors can be confident that Robo Advice can navigate any tough times we see in the future.
 Money and Machines: 2021 Global Study, Oracle