Why robo-advice must be fully automated

There appears to be some confusion about what robo-advice is and what fully-automated investment advice is.

This lack of clarity is partly due to the fact that the robo-delivery system is new to Australia, but it’s also because there has been an unnecessary haste to get systems in place and letting those systems’ delivery/fulfilment mechanism be finalised later.

A fully automated advice system means all elements are delivered in the one engagement. Too often, robo is turning into ‘straight through to a person’ advice. This is not what the consumer wants and it’s not what savvy advisers should offer. 

The key features of a fully automated service:

• Transaction captures are accurate and complete
• The paper trail never stops being electronic
• Client confidentiality is assured because no external parties view the data
• The investments are HIN-based, adding another level of security
• Risk profiling cannot be altered since it is non-discretionary
• Statement of Advice, MDA agreements are generated and delivered automatically, with all KYC requirements fulfilled
• CMA and trading accounts are opened automatically, within minutes, with all AML requirements accounted for
• As soon as investor funds hit the trading account, they are invested automatically.

Essentially, fully automated systems must deliver on their promise, which is to be fully automated, with no human intervention whatsoever. They must exercise fast and accurate document delivery, as well as having excellent communication for the investor during the process.

Learning from the US

The local financial industry can learn from the success of US robo giants like Betterment and Wealthfront in the US.

About US$3 billion has been invested with these companies over the past three years, which is huge growth.

The US has a history of being at the forefront of new and innovative investment mediums that Australian investors and advisers have adopted, such as ETFs and platforms. Over time, robo-advice will have a similar impact, but it won’t happen overnight.

Some HNW clients will use robo

As in the US, the industry also has to accept that some HNW clients may use robo in non-advised investments. The experience in the US has been that it is not just smaller investors who are using these companies. Larger investors, who believe in passive investing, are also using them. This doesn’t mean, however, that they don’t value good financial advice and won’t pay for it. They are simple exercising their right to choose how their savings are managed. 

Whether clients are wealthy or at the start of accumulating wealth, automated advice may be the advisers’ best ally. The good adviser will see how it can help them in the future to offer initial or deeper advice and not hinder the online investor at the outset.

Matthew Kidd is managing director for diversified financial services group Omniwealth