This post was first published in March 2016, it has since been updated to include new entrants and update pricing for some providers.
Update July 2017 - Macquarie's Owner's Advisory is now closed to self directed investors. Betterwealth has closed down and Ignition Direct seems to no longer be promoting their product to self directed investors. Competition in the space has seen many providers reduce their fees. All updates are represented below
If there is a term that in 2015 became synonymous with Wealth Management Innovation, it is Robo Advice. Also known as Automated Investing, Robo Advice has been the buzz word for the last 12 months or so. Traditional wealth managers are scrambling to get involved, and startups are promising to disrupt the status quo. Today we’re going to take a look at what Robo Advice is, and who the players are in the Australian market.
There’s been so much hype over Robo Advice that the definition of what it actually is begins to become blurred. Put simply, most Robo Advisers in the market help you decide on an investment portfolio, invest the money, and automatically rebalance it for you. Robo Advisers do not assist in complex financial decision making such as ‘should I pay off my mortgage or salary sacrifice to super?’, ‘should I invest in shares or property?’ or ‘what is the most tax effective way to structure my investments?’. Decisions like these still requires advice from a human adviser for now. Once all of these complex decisions have been made and you have decided you want to invest in share markets, the robo adviser helps to optimise your investments.
Typically the Robo Adviser process goes something like this:
Robo Advice originated from our friends in the US. With the ETF industry much more mature in the US than Australia, and with investors still reeling from large portfolio losses in the Global Financial Crisis, the movement to index investing really was gaining momentum in the early 2010s. Evidence had shown for a number of years that the vast majority of active fund managers (where the manager tries to outperform the share market) tended to underperform the market over the long term. These managers tended to be managing ‘mutual funds’, referred to as ‘managed funds’ in Australia. So some entrepreneurial types came up with a concept of combining low cost index tracking ETFs with tried and tested portfolio management techniques and a slick signup process and launched the first round of Robo Advisers. Betterment and Wealthfront are the most well known, but there are now too many Robo Advisers available in the US to list. As per most innovations that come out of the US, it didn’t take too long for the model to be picked up in Australia.
We’ve counted 5 players now available in the local market. There’s also a number of others that are due for launch in 2016 & 2017. Firstly onto what is available now:
The 5 Robo Advisers currently available locally are: Six Park, Stockspot, Quietgrowth, Acorns and Clover. We take a bit of a closer look at each below:
Launched in May 2016, Six Park offer 5 ETF porftolios all overseen by their investment advisory committee. Each investor is setup with a Macquarie Bank Cash Management Account (CMA), and ETFs are traded under the individual’s own Holder Identifier Number (HIN) in a Managed Discretionary Account (MDA). The signup process includes a Statement of Advice which outlines their recommendations. A Six Park portfolio requires a minimum of $10,000 to be traded, but clients can start the process and open up accounts with them for just $1. Six Park also offers an SMSF option through their SMSF partner.
Launched in 2013, Stockspot was the first Robo Adviser in Australia and is probably the most well known. They offer 5 ETF porftolios, and their structure involves each investor being setup with a Macquarie Bank Cash Management Account (CMA), and ETFs are traded under the individual’s own Holder Identifier Number (HIN) in a Managed Discretionary Account (MDA). The signup process includes a Statement of Advice which outlines their recommendations. Stockspot’s offering is run through a combination of tools including Macquarie CMA, Sanlam Private Wealth, DesktopBroker and Sharesight portfolio management. A Stockspot portfolio can be setup with a minimum of $2,000.
Quietgrowth's investor’s funds are held in Segregated Client Accounts (SCA) managed by Saxo Capital Markets. Quietgrowth offers 5 ETF portfolios, has a minimum investment of $2,000 and was launched at the end of 2015.
Launced in January this year and possibly the one that has generated the most buzz, Acorns has a unique model where it invites investors to link up their bank accounts and credit cards, and then offers to round up all their transactions to the nearest dollar and invest this amount into an ETF portfolio. It is effectively a piggy bank for the modern day. Whilst this gimmicky feature won’t turn you into a millionaire in a hurry it is an effective way to get people started with investing. Investors can also invest larger amounts, and have regular savings plans just like all the Robo Advisers listed above. Acorns is structured more like a regular managed fund where investors’ funds are pooled, and has a minimum investment amount of $5. Yes that’s correct, $5! Acorns Australia is backed by its US parent, which launched in 2014 and reportedly now has over a million US investors.
Launching in October 2016, we can't tell how many portfolios Clover offers. Clover runs a similar model to Stockspot, Ignition Direct and Six Park with investors holding a Macquarie CMA and executing trades through OpenMarkets.
Fees are important when it comes to Robo Advisers, particularly when they tend to recommend ETF portfolios, where of course one of the key advantages of the ETFs are their low fees. If the administration fees that the Robo Advisers charge is too high then one of the key benefits of investing in ETFs has been lost. Below we take a look at the fees of each of the Robo Advisers listed above, and compare the fees on different sized portfolios. The fees exclude the cost of the underlying ETF portfolios which as seen in our low cost ETF portfolio can be as low as around 0.20% pa but more realistically somewhere around 0.25-0.40% pa:
|Robo Adviser||Fee Schedule||$10,000 portfolio pa||$100,000 portfolio pa||$500,000 portfolio pa|
|Six Park||Asset based fees of 0.30% to 0.50% pa||$50||$500||$1,500|
|Stockspot||Fixed fee of $50 pa (for balances greater than $50,000) with asset based fees of 0.4% to 0.6% pa and a minimum of $72 pa*||$72||$550||$2,050|
|Quietgrowth||Asset based fees of 0.40% to 0.60% pa with no fees for balances under $10,000||$0||$450||$1,960|
|Acorns||$15 pa for accounts under $5k or 0.275% pa for accounts over $5k||$28||$275||$1,375|
|Clover||Asset based fees of 0.45% to 0.75% pa with a minimum of $84 pa||$84||$600||$2,475|
* A honeymoon fee discount applies for balances under $10,000 for the first 6 months.
It can be seen that the fees can vary significantly between all of the options. Not only that but there are other slight differences between different options, for example, some Robo Advisers only automatically rebalance over a certain limit, some require you to opt in or out of auto rebalance, some have a different fee structure for SMSFs and as we’ve called out above, they are all structured differently with differing levels of ownership of the underlying assets between the Robo Advisers. We advise investors to ensure they read and understand the Financial Services Guides and Terms and Conditions and ensure they are comfortable before investing with any of the Robo Advisers.
Robo advisers have used technology and the buzz around ETFs to carve out a niche for themselves, but the basic premise that they are founded on is nothing new. They advise on a diversified portfolio based on the investor’s risk profile. Investments like this have existed for a number of years through the form of managed funds. It is highly likely that your super fund is invested in a similar manner.
If you want to go the old school method and invest in some managed funds, the first thing you need to do is determine your investment risk profile. All of the Robo Advisers do this as part of their signup process but the managed fund application form won't include a risk profile questionnaire. A google search will find a number of Risk Profile questionnaires which will help you determine your tolerance. We’re not in a position to advise which is best, so we do advise to be careful with these.
Once you’ve determined your risk tolerance, the next thing to do is find some managed funds. There are literally hundreds of diversified managed funds available in Australia, but if you are set on index investing, there are fewer options. Some of these are:
Whilst the fees within the managed funds may look higher than the robo advisers, the robo adviser fees do not include the underlying ETF management costs (of ~0,25% - 0.40%), wheras this is built into the management fees of the managed funds.
Of course the other obvious option is to do what the Robo Advisers are doing yourself. To do this you could determine your investment risk profile, use the ETF Watch Fund Database to find a bunch of suitable ETFs and invest directly through a broker. The disadvantage of this is:
If you decide to go the DIY option, the amount you have to invest really comes into consideration, as the more you invest the cheaper trading generally gets. You should also consider the cost of your time vs letting someone do it for you.
There’s plenty more Robo Advisers soon to hit the market, some of these that we know about are:
We think that by the end of 2017, there will be over a dozen robo advisers available in Australia, with some of the new entrants attempting to differentiate themselves, to create their own niche. It will be interesting to see how it plays out!
At a mammoth 2,000 words that concludes our Robo Adviser roundup. We hope you stuck with us and got some insights out of the post. Please feel free to leave a comment about your experience with any of the Robo Advisers listed or, if you think we’ve missed one, please let us know and we’ll check it out.