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Looking deeper than the home page of roboadvice

It’s fashionable to be enthralled by the glamour of financial technology, or ‘fintech’, and in particular, ‘roboadvice’. It’s the cheap disrupter, replacing those nasty and expensive financial advisers. Easy to access via the dynamic home page, it’s the investment solution for millions who would never pay to see an adviser.

The recent announcements by Macquarie, BT and National Australia Bank have taken roboadvice out of the realm of the startups struggling for resources, to the mainstream where IT budgets run into billions.

How much of it is form over substance, more about the presentation, the so-called ‘customer experience’, than it is about offering appropriate advice and a good investment outcome?

It will improve over time, but it’s not there yet

Speculating about whether roboadvice will attract money and fill the role of financial advisers is like cogitating about driverless cars. There seems obvious potential, but neither the technology nor the public are ready. But most new technologies start that way, with incumbents failing to see the full potential, then Amazon destroys Borders, Netflix kills Blockbuster and Kodak ignores its own invention, the digital camera.

The definition of roboadvice is evolving, covering automated financial advice with some formulaic investment solution. In most cases, it works by the customer answering questions online, usually about risk appetite, age, income and assets, and rules are applied to find the optimal allocation of investments. It aims to fill the gap between what the public is willing to pay for financial advice (not much) and what full professional services cost (a lot).

A software developer recently told me he has a list of 41 roboadvice businesses in Australia either in the market or under development. Globally, companies like Wealthfront, Betterment and Nutmeg have raised hundreds of millions of venture capital dollars, and major businesses like Charles Schwab, Vanguard and Fidelity are already in the market.

Two different business models called 'roboadvice'

While there will be an unlimited variety of robo offerings, it’s important to distinguish between the two main emerging types:

  • The ‘Business-to-Consumer’ (B2C) robo, which takes the client all the way from risk profiling through an ‘algorithm’ to an investment outcome, invariably leading to an asset allocation among different Exchange Traded Funds (ETFs) to reduce the cost. The robo’s revenue comes from an advice or subscription fee, or a percentage of assets under management following an investment.
  • The ‘Business-to-Business’ (B2B) robo, where an existing superannuation fund offers an online planning tool, a type of retirement outcomes forecaster that simulates a range of retirement incomes based on different market conditions, savings patterns and time horizons. The robo’s revenue comes from a licence or usage fee paid by the superannuation fund, or the fund may take equity or own the robo.

Neither presents a serious threat to full service financial advisers at the moment. Roboadvice cannot handle complex issues like estate planning, social security impacts or selecting aged care facilities. At best, it is limited advice for the masses, the 80% of people who don’t see an adviser.

The B2B tools are useful for member engagement to help people think better about their future super balances. A member who believes $500,000 will fund 30 years in retirement may not bother putting more into super until they realise it will not last their life expectancy with an acceptable living standard. Further enhancements will provide ‘whole of wealth’ outcomes, not limited to superannuation.

Regulator focus on the investment outcomes

It is the B2C robos that will come under greater scrutiny from regulators. They face the added complication of recommending and implementing an actual portfolio as part of a product sale, not simply hypothesising about what might happen a few decades hence. This requires a compliant auto-generated Statement of Advice and a tougher test of whether the recommendation is really right for the client, often based on flimsy profiling.

While the industry regulator, ASIC, is keen to engage with this new digital world, it will not be doing any favours to the upstarts. Louise Macaulay, ASIC’s Senior Executive Leader in the financial services team, told the recent Financial Planning Association (FPA) Conference:

"Our view is that the legislation is tech neutral. The same standards will apply whether it's technology-based advice, or face to face ... They (roboadvisers) need to make sure that clients understand what they are buying; and that they are not just clicking from one screen to another."

Although the B2C roboadvisers claim to be offering personal advice, the simple questions currently generate only superficial information resulting in standardised asset allocations. Some robos ask only a few basic questions about risk appetite, time horizon and capacity for loss.

Louise Macaulay went on to say:

"The sector needs to improve the compliance and record keeping. There is also the potential for large scale loss if there is a flaw in the algorithm."

In May 2015, the United States’ Securities and Exchange Commission (SEC) issued a caution about roboadvice:

“An automated investment tool may not assess all of your particular circumstances, such as your age, financial situation and needs, investment experience, other holdings, tax situation, willingness to risk losing your investment money for potentially higher investment returns, time horizon for investing, need for cash, and investment goals. Consequently, some tools may suggest investments (including asset-allocation models) that may not be right for you.”

The robo investment experience

I completed the online application process of an Australian roboadviser, expecting a growth-oriented portfolio based on my responses. It allocated for me 44% into Australian government bonds, 10% into gold and 11% in emerging markets equities. That is 65% of nothing I want, such as Australian shares, developed country shares, corporate bonds and property. Anyone given such a portfolio should carefully scrutinise whether it is right for them, especially when government bond ETFs yield less than 2%.

And the total cost on a $20,000 investment with this low cost disrupter’? It was 1.6% per annum, including management fee, administration fee and investment fee, far more than the standard MySuper fund from retail and industry fund incumbents of below 1%.

Gaining a consumer foothold will be tough

Most startups without links to existing clients will not succeed in their own right in gaining a strong enough investor base. The cost of acquiring customers will be too great and the competition at low or no margins will become intense from the big names. Many startups will turn into B2B players and sell out to large impatient retail or superannuation funds who want the intellectual property and a few smart resources on the team.

It’s only a matter of time before more large wealth players use robo to transition customers to their more complete services. Global names like Charles Schwab have no existing Australian business to cannibalise, and a company like Blackrock can drive demand for its ETFs. Expect these companies to have sophisticated offers at price points no new startup can match.

As a result of the moves into roboadvice, consumers who currently receive no financial advice will benefit. With sophisticated graphics and informative modelling of outcomes, robo offers will increase in sophistication and attract thousands who would never visit a financial adviser. Roboadvice will gradually improve in ways we can only speculate on, much like we could not foresee the extraordinary ways other technologies have changed our lives.

And the full service, personal adviser? Many will embrace robo to service the disengaged or less wealthy, and there will always be a role for person-to-person contact. Regardless of how good the website is, it will never put an arm around the worried investor and explain market events with an intimate knowledge of the client's experience, entire background and goals.


Graham Hand is Editor of Cuffelinks.


Bartosz Golba
December 12, 2015

Thanks for sharing Graham!

You say that you didn't approve of 65% of your robo generated portfolio. I would argue then that you're not really a target client for robo advisors then as you're probably sophisticated enough to understand their proposition. My colleague recently wrote a piece on Australian IFAs attitude towards low-cost online management platforms in general and it looks like those new competitors simply serve customers who have been ignored by the industry so far. You can read more here:

The other thing is that you wouldn't necessarily be happy with all the advice you'd receive from humans... I believe Deutsche Bank's latest robo-like solution can actually appeal to more sophisticated investors (possibly HNW clients), as it gives you more flexibility to adjust proposed portfolio. It's a fresh approach do B2C robo advisors and I'm curious to see how it develops!

Greg Einfeld
December 11, 2015

Thanks Graham for another thought providing article on robo-advice. A few comments:

1. You refer to 2 types of robo-advice: B2B v B2C. There are other dimensions too: Scaled (investment only) v holistic. pure robo v hybrid robo/human, personal v general advice, implementation v advice only. So we will see a wide variety of offerings among the 41 you refer to.
2. "Roboadvice cannot handle complex issues like estate planning, social security impacts or selecting aged care facilities." - Nor can many human advisers. And even if they can, only a fraction of their advice will address these areas.
3. You received an inappropriate asset allocation - this is a problem with the particular robo service you chose. If a human adviser had made the same recommendation, is it a reason to avoid all human advisers?
4. The big unknown is your last paragraph - explaining events with an intimate knowledge of the client. In 10 years this might just be possible using machine learning

Scott Barlow
December 10, 2015

Clayton Christensen who literally wrote the book on disruption (The Innovators Dilemma) defined a disruptive innovative as one that allows a whole new population of consumers at the bottom of a market to access a product or service that was previously the preserve of a few. He said the characteristics of disruptive businesses, include: lower gross margins, smaller target markets, and 'simpler' (read crude) products and services that are not as attractive as existing solutions. Thus robo-advice fits the "disruptive" definition perfectly, with one critical exception...but more on that later.

Planners who think robo-advice's inability to undertake more complex tasks makes them somehow immune to the disruption, do not understand the nature of a disruptive innovation. It is not that an invention (e.g. robo-advice) is "better" that makes it disruptive, but that it causes all consumers to reappraise the value of what they already receive.

And consider this, when it comes to investing, the traditional planners value proposition is indistinguishable from robo-advisers. This is the crux of the threat that will explain the 'hollowing out' of the financial planning industry. Clients will move in droves to the cheaper version because they can't distinguish it from what they already get.

That's not to say robo-advice will be a success. In fact, right after it hollows out the industry, it too will fail because it makes the same mistakes traditional financial planning makes:
1. Starts with a risk-profile instead of starting with the clients objectives (or, assumes risk profiling is an input when it should be treated as an output)
2. Has no regard for whether an asset is "cheap" or "expensive" (i.e. no valuation methodology guides the asset allocation)
3. Fails to separate the retirement forecasting engine from the portfolio construction process (this is particularly the Achilles heal for the B2B robo's the ISF's are about to roll out).
4. Assume investors will get the mean return over time.

Which brings me to that critical exception of what makes an invention truly disruptive, which is that it must solve a key problem and as the list above reveals, robo-advice not only fails to solve the key problem for retirement savers, it - just like traditional financial planning – fails to even acknowledge the problem!

steve nagle
December 04, 2015

Great article Graham,
I share your view on what is available now and your optimism for the future, and enjoyed your analogy to driverless car cogitation. It's a good comparison to thinking about roboadvisers that can build rapport, read body language, empathise and build trust. When roboadvisers can get to that point we can talk of replacing humans, until then the discussion is about what part of what people do can most readily be automated.

Tim Richardson
December 04, 2015

Graham is correct to state that robo-advice will find its role as an acquired tool for low cost super funds and other retail offerings rather than as disruptive brands.
However, much of this debate is framed in terms of how investors weigh up the relative merits of automated versus face-to-face advice. The reality is that these are very different markets comprising very different customers.
Both business models will endure but it is likely that over time many within the technology-savvy younger demographics who grow up investing (initially small balances) in low-cost supers using simple automated tools will be unwilling to move to a high cost offering.
Rather, as they grow their funds and confidence, they will find their own solutions using a mix of automated tools that model outcomes, their own research and occasional face to face advice - e.g. tax and estate planning where the adviser retains a competitive advantage - for which they will be willing to pay.
Advice will endure, but for most investors in the long term it will become disaggregated and accessed at various points in the investment process.

December 03, 2015

My experience with real financial planners left me supporting the robots.
My 20 page plan from the human showed my returns over the 10 yrs I had left until retirement and the funds I was to invest in. After reading the plan I returned for my next appt. to ask how she showed a 9%pa return when the highest return for the 3 funds recommended was 6%. I was told to expect the returns to improve to 9%. I told her I did not want to be put into these funds and told her which funds my transferred lump sum should be invested in. Upon getting internet access to my account I found she had not put me into the funds I requested but her original high commission funds I immediately complained to management, got my funds returned, and started my own SMSF. I will never trust a financial planner.

December 04, 2015


Unless this was several years ago I have trouble believing you.
Commissions have been removed for several years. And you would have signed an authority to proceed which listed what you were doing. So methinks your story is all made up for your own reasons.
Now if you went to a bank or a tied adviser (aka = salesperson) then more the fool you.
If you had gone to an independent adviser who would have simply charged you a fee you would have got advice.

SMSF Trustee
December 04, 2015

Not a very helpful response, Terry, and one of the reasons the industry sometimes struggles for credibility. A better response would be to show some sympathy with the client (in this case Doug), believe what he has said and agree that it's a terrible experience and that the adviser in question let the planning industry down, gently point out that the majority are not like that (including, by the way, the majority of aligned planners who don't deserve to be maligned as you have done) and point him in the direction of a list of planners who have good reputations in the industry.

Then you might have stood a chance of getting back a client who was otherwise lost.

My experience with planners has only been positive, so Doug all I can say is that if you ever find you need additional support with anything to do with the SMSF, don't be afraid to give another planner a go. There are plenty of good ones out there.

David Williams
December 03, 2015

Good advice outcomes rely on clients participating in trade-off discussions. To understand what elements of a plan are being traded off against each other requires a properly informed client.

Even a simple discussion designed to ascertain what time frame is to be used in illustrations for a client involves multiple variables such as health, surroundings, attitude, family history and diet,The complexity increases significantly with a couple.

Arriving at the agreed key drivers of the plan requires many trade-offs which need a professional adviser to identify and steer each client through. This is the real value in advice, not the ultimate investment strategy which is by comparison relatively easy to automate.

To achieve the commitment of a client, rather than merely their consent, requires an informed face to face discussion. Robotics is a tool for improving efficiency of the advice process, not a substitute.

Michael hill
December 03, 2015


Why not make it clear that these 'robots' should be avoided like the plague. They seem to me more dangerous than no advice because they may promote a sense of security in the client which is far from warranted.
I am an SMSF trustee, not a professional.

Michael Hill Noosa

Graham Hand
December 03, 2015

Hi Michael, I do see a role for roboadvisers, particularly in showing potential outcomes based on modelling savings patterns and market performance. At this stage, I want to explain some of the limitations so we are not too 'starry-eyed', but I would not judge them before they've undergone more development.

Peter C
December 03, 2015

Love this article – really on the money.

Donald Hellyer
December 03, 2015

I love this part

Louise Macaulay went on to say:

“The sector needs to improve the compliance and record keeping. There is also the potential for large scale loss if there is a flaw in the algorithm.”

There was / is large scale loss arising from the traditional advice model of putting retail investors into actively managed funds, 80% of whom under perform over 5 years. Even now the amount of retail investors in ETFs and passive funds is low. Is there is a systematic flaw in the traditional business?


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