‘Robo’ advice for SMSF’s: Can we trust machines?
The computer age is here and growing faster than a freight train. Our accountants here in Melbourne and around the world are faced with offering their SMSF clients a new type of advice – ‘Robo Advice.’ While this practice relies on complex mathematical algorithms, it cannot replace the human element. Some experts agree that the potential and positives of the model offer transparency, control and flexibility.
In a recent survey, the popularity of Robo Advice is being increasingly accepted by investors over the age of 60. One would think that winning over this age group, traditionally minded, would have been the biggest challenge. The financial advisors are the ones that have not jumped on board quite yet.
By offering Robo Advice, there is an opportunity to reach an untapped market, those investors who don’t yet wish to engage a professional, but need sound advice. These clients may eventually make that personal connection, or seek future advice the traditional way. This Robo model should not affect the relationship of those existing clients with large investment portfolios either way.
There are several limitations to Robo advice. The algorithms are based on investment models that use the MPT – Modern Portfolio Theory. It is essentially a set of principles used to construct an investment portfolio. It also uses a survey to determine the client’s risk profile. These tools may be fine to lay a foundation, but without the human element involved there may be crucial variables not taken into consideration or omitted, which could prove inefficient.
By design the MPT cannot take the tax and transaction costs into account when customising a portfolio. The MPT is not able to accurately predict market volatility either, although it is able to summate limited volatility. Since markets do not accurately price risk, it is not able to take that potentially important information into account with the programmed variables.
Investors often do not act rationally, the MPT neglects this aspect of the human emotion. Automated advice and guidance will fail to give investors the complete picture and risk-minded advice they sometimes need. In general, machines cannot replace an experienced human’s advice and judgement when it comes to investments.
Some advisors worry that unscrupulous providers may try to manipulate the algorithms into promoting their own services and particular investments. The concern is a valid one, since there is no regulation on the software that is currently used. Since it is computer generated Robo advice, who would be responsible for handing out bad information or best interest duty?
The financial advisor should be able to take the information fed into the Robo and determine the best case for their clients. Having a relationship with the client is foremost when planning investments and making those financial decisions. This is why the human element should always be involved.
This subject of Robo advice is in high debate, and probably will continue. Despite concerns, SMSF trustees will lead the charge when it comes to automation because they usually know what they want and don’t mind letting algorithms help them choose. The Robo model appeals to certain investors, mainly those who are willing to explore new technology territory. Investors with large portfolios will likely stay with the personal advisor they know and have proven successful in the past. If you have any concerns or questions about Robo advice please contact our Melbourne accountants.
Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.