The number of financial advisors in Australia continues to fall, dropping from 26,500 to 16,671 between 2019 and 2022, according to research from Rainmaker Information.
Alex Dunnin, executive director of research at Rainmaker Information, says, “All projections for advisor numbers point to no recovery without profound structural industry policy change.” If this exodus continues unchecked, Rainmaker says Australia could run out of financial advisors within five years. While this is a dire scenario, Dunnin notes, “The current trend of advice industry exits is so baked-in that it is naïve to expect a recovery in financial advisor numbers anytime soon.”
It’s worth pointing out many advisors have chosen to leave the industry because of the stringent professional requirements introduced following the Banking Royal Commission.
Nonetheless, Australians aiming to build wealth and financial security aren’t wasting any time exploring other options.
Finder’s Consumer Sentiment Tracker (September 2022) shows one in ten Australians plan to use a robo advice service – a figure that jumps to one in five Gen Zers, our most tech-savvy generation.
What is the appeal of robo advice?
The ultra-low cost of robo advice makes it both affordable and accessible.
Finder explains that on a $10,000 investment, the average robo advice fee is 0.3% annually. Add in other investment costs (usually fees on exchange traded funds), and the total fees are likely to be around 0.4%-0.5% per annum. That works out to an annual cost of about $40-50.
Let’s put this in perspective.
A family visiting McDonalds can spend $20 on two McHappy meals for the kids. Add in a burger each for mum and dad, and you’ve blown $40. So for the cost of lunch at Maccas, you can have your investments professionally managed, regularly rebalanced and accurately reported on at tax time. It’s a far cry from the $3,000-plus you could expect to pay for face-to-face advice.
No wonder so many robo advice investors say “I’m lovin it!”
The diversity premium: 3.1% annually
The benefits of robo advice go beyond affordability and value.
As Finder notes, Australian robo-advisors offer an average of 7 investment solutions, of which 70% are diversified, meaning your money is spread across shares, property or bonds.
In order to keep costs down, these investment portfolios are usually comprised of exchange traded funds, which themselves are highly diversified.
It makes robo advice an easy way to diversify your investments.
The benefits of this diversification were put to the test by a 2018 Danish study. In particular, the study found:
- Retail investors typically spread their equity investments over very few different stocks. Most (66%) hold only one stock. Fewer than 2% hold more than ten stocks.
- Portfolio risk decreases as the number of stocks in a portfolio rises – but it takes a decent number of different stocks to really bring down risk.
- If retail investors shifted from an under-diversified portfolio to a market portfolio (such as an exchange traded fund), they could boost returns by 3.1% annually.
The upshot is that it’s no surprise robo advice is shaking up the investment industry. It’s a value-packed, low stress option that offers an opportunity to grow a portfolio with the level of diversity required to dial down risk and the potential for higher returns. And that’s exactly what most investors are looking for.
5 Florentsen, B., Nielsson, U., Raahauge, P., & Rangvid, J. (2019). The Aggregate Cost of Equity Underdiversification. The Financial Review, 54(4), 833-856. https://doi.org/10.1111/fire.12212