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Automated online investing or robo advice is a technology that gives anyone access to professional investment advice without needing to see an adviser in person.

Automated advice is becoming popular with investors who are starting out as well as retirees and self-managed super funds (SMSFs) who are looking to spend less time managing their portfolios.

Interest in automated investing has been rising in Australia, particularly during lockdowns.

Australia is still catching up to the rest of the world - the current use of robo advice in Australia is 7% compared to the USA where 23% of online investors use a similar service.[i] Global robo-advised assets are forecast to increase from US$2.6 trillion to US$6.2 trillion by 2027.

Features, benefits of automated advice / online investing

1. Diversification

A robo adviser can build a personalised, diversified portfolio for you instantly – and you can start with a small amount of cash.

Portfolios built by robo advisers aim to minimise risk while maximising returns through diversification across assets. Spreading your money across different assets is the most reliable way to grow your wealth in both good times and bad.

Stockspot uses ETFs (Exchange Traded Funds) as the basis of how we invest to give you a well-balanced portfolio. Instead of investing in one or two companies on the stock market, an ETF tracks the broader market or an index like the top 300 Australian companies or the largest 100 companies in the world.

This can help to smooth out the short-term ups and down in the market and gives more stable returns compared to picking individual shares. for example, a robo adviser with an allocation to government bonds and gold can help to cushion the impact of share market falls.

2. Easy to use

All you need to do is answer a few quick questions about yourself, your age, your risk capacity, and your need for regular dividends. Using that information, the automated investment adviser will recommend a strategy with the right mix of assets to match your personal situation and goals. 

Topping up regularly is the ‘secret sauce’ of investing, and automated investment advisers make this easy to do. You can easily add to your investment account whenever you want. You might want to set up a regular deposit or deposit spare cash whenever you can.

Once you’ve started investing, you can view your investments via an online dashboard or app. This is where you can monitor your portfolio to see the performance of your investments and keep track of your investment goals.

You can usually use the dashboard to tell the robo adviser about changes in your life (ie buying a home / changed investing time horizon) that may affect your investment strategy. Your robo adviser will make relevant changes to your portfolio if needed.

3. Algorithms prevent emotion-based investing decisions  

A US investment research firm analysed individual investor behaviour for more than 20 years and found the average investor loses approximately 1.8% per year from common behavioural mistakes.[ii]

One of the benefits of using a robo adviser is that you remove the risk of human error in respect of investing decisions. Instead, precise algorithms manage reinvesting your dividends and rebalancing your portfolio in line with market movements.

A good example was March 2020, while many human advisers were advising clients to stay out of markets, automated advisers like Stockspot were automatically rebalancing for clients

Using a robo adviser doesn’t mean you’ll have no personal assistance. Technology optimises your investments but people are always there to help you when you need advice or reassurance.

Risks of automated advice

Automated investing isn’t for everyone. If you want to be actively selecting shares or buying and selling regularly, setting up an online brokerage account may suit your needs better as robo advisers won't give you the ability to trade.

Automated advice is a long-term strategy for building wealth consistently and is not going to generate high short-term returns.

If you’re selecting an automated adviser, you might want to look out for the following risks:

1.  Are there hidden fees?

Automated advisers generally have lower fees than human advisers. However, some automated advice options have extra costs to be aware of. For example: 

  • Some charge separately for brokerage or for rebalancing– in some cases this can end up incentivising them to ‘overtrade’ to make more on brokerage fees.
  • Some don’t include monthly fees in the returns you see in the app. Make sure what you’re seeing is an ‘after-fee’ return.

2. Are you getting personal advice?

Some automated investment advisers only provide a product menu, and it’s your job to pick products from the choice of options. The online provider takes no responsibility if you choose the wrong strategy and it’s your job to check continually that the strategy you chose is suitable for your investment timeframe and goals. This means you could end up taking too much or too little risk.

Look for an automated adviser that considers your personal financial circumstances when making recommendations. You should receive an initial advice document when you join and an annual review that ensures the advice stays consistent with your goals.

3. Is the advice independent?

The Royal Commission into Banking Misconduct highlighted that some advice businesses and investing platforms are biased towards their own underlying financial products or ones that pay them a fee.

Make sure your automated adviser isn’t owned by the same business as the underlying funds, and isn’t receiving payments from products it recommends. Conflicted payments like these can lead to an automated adviser giving advice that isn’t in your best interest.

For many people, automated advice is a sensible way to build wealth using proven investing strategies and without needing to continually keep an eye on markets.
 

References 

[i] Investment Trends Robo-advice Report, 2020

[ii] 2020 QIAB study 

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