In the US, the robots aren't just coming, they're here. The charge is led by players such as Vanguard, Schwab, Wealthfront and Betterment, with banks such as Wells Fargo and Bank of America Merill Lynch in hot pursuit.
Research from KPMG in 2016 – aeons ago in fintech terms – found what was driving interest in robo-investing were consumer trends such as a desire for increased transparency into investment options and decisions, increased accessibility through low or no fees and enhanced customer experience via web and phone apps.
It also found that although new and inexperienced investors are “prime candidates for digital wealth-management services”, many existing clients were “also interested in transitioning from more expensive managed account programmes into lower-cost automated alternatives”. It further reckoned that banks would be remiss to ignore the opportunity to add robo-advising to their product portfolios.
Over here, the robots are taking their time. "Most innovations take hold in the US first and robo-advisers have done that, and taken hold a bit in the UK too so while it's not prevalent here yet we would expect firms to invest in technology and for that type of distribution to occur in Ireland too," says Ian Quigley, director of investment strategy at Investec.
Because of the relatively high fixed cost of running a business in financial services, you need scale so, while there is lots of disruption in the fintech sector, it may well be that it is existing financial services firms here that will invest in robo-advisory services first, he reckons. This would see them grow as part of existing banks’ wider offering, rather than see a surge in specialist providers.
Equities investment is a more common practice in the US, with more people familiar with stocks thanks to their employer-sponsored 401(k) retirement savings plan.
Keeping costs down
The robo-advisers’ progress here may have been slowed too by the currently benign economic conditions. The recession led to an investor focus on keeping costs down, says Quigley, going execution-only, not paying for advice, opting for passive funds, and not paying for active management.
Not only has that changed, but “the data shows that, over time, such strategies don’t solve the behaviour gap in investing, that is, where people buy when they are feeling confident and sell when they are feeling less so. It’s what leads to that cycle of fear and greed. Robo-advisers don’t offer any way of stopping that,” he says.
It’s those knee-jerk reactions to market information that makes individual investors – the kind who may be most attracted to robo-investing – trigger-happy with the sell button.
Long-term investors in equities need to get their allocation right at the beginning, and then chill. Quigley points to a study from JP Morgan that looked at investment in the US from 1998 to 2017, and found average annualised return for equities was 7.2 per cent, compared with 6.4 per cent for a balanced portfolio and average investor returns of just 2.6 per cent.
“The evidence shows that where people do it themselves, if they have the emotional fortitude to hang in there, they will do well. But the average person doesn’t.”
Traditional human advisers can be just as transparent as any platform too. Investec gives all data for its discretionary portfolio to an independent third party to analyse, a move which is standard practice in the US.
The other reason to believe old-school human advisers are more effective is because they have a very human need to be so – they only succeed if you do.
“Our incentive is to do really well for you. We charge fees as a percentage of assets, so our interests are aligned,” Quigley says. “Yes, improved transparency and advances in technology are all helpful when it comes to managing finances but I don’t think you can take the human out of it. After all, it’s a broader picture that they are looking after, including estate planning and tax planning.” A robo-adviser may not be so concerned about your concerns.
“There is a hell of a lot of noise out there too. On any given day of the week, whether it’s China, or Trump, or Brexit, there is always a reason not to invest. Having a [human] adviser helps and adds value.”
Saving for retirement
According to Bernard Walsh, head of pensions and investments at Bank of Ireland, this is the time of the year when the bank has many engaging conversations with customers about saving for retirement. "Estate planning is an important part of the conversation. We talk to customers about beginning with the end in mind – the end being retirement, not the after-life," he says .
Your money can be invested in many different ways depending on whether you want a guaranteed income, tax-free cash or an invested sum at retirement – or a combination of all three.
“A guaranteed income or an annuity would be an attractive option but with annuity rates so low, customers are shunning this route. Furthermore, if you die after a guaranteed period, in many cases, your pension will die with you. On the other hand, if you choose the investment route through an Approved Retirement Fund, the value of your money will become part of your estate. There is a real trade-off here between guaranteed income and assets. It is a critically important decision that can be irreversible, so getting good quality advice is paramount.”
Begin your estate planning well in advance. “Unfortunately, we come across far too many cases of people passing away unexpectedly without making adequate arrangements for those left behind. This can mean that family members can inherit some serious problems in deciding how an estate is to be divided and it can result in hefty capital acquisitions tax bills,” Walsh says.
Put a plan in place, then draft a will and an enduring power of attorney. “An enduring power of attorney is a document in which you appoint one or two persons to look after your affairs, in the event that you are medically diagnosed as incapable of doing so, at some point in the future. The important thing to note about an enduring power of attorney is that it can only be put in place while you have the mental capacity to do so and, it does not become effective until after you become incapable of looking after your own affairs,” says Walsh.
