Robo-advice (also known as digital advice) describes financial advice delivered online, via computer, tablet or smartphone. It uses algorithms and technology in place of a human financial adviser.
It can offer convenient and potentially lower-cost financial advice by making use of algorithms and technology. You enter personal details, such as age, gender, income, assets, financial goals and risk tolerance, into a computer program and it generates financial advice, based on the details you entered. Before you use robo-advice, you should make sure this style of advice will suit your needs.
When you register with a digital advice website, you will answer questions about your income and expenses, assets and liabilities, goals, objectives and risk tolerance. This gives the robo-adviser information about your financial situation and aspirations. The computer algorithm then considers this information when making recommendations. The robo-adviser will produce an automated statement of advice (SOA) which explains the recommendations and other important information for you.
A robo-adviser which only gives general advice will not take into account your personal circumstances and you will not receive an SOA. You must be told upfront that you are only receiving general advice. With general advice, you’ll need to decide whether the recommendation is appropriate for you taking into account your goals, objectives and risk tolerance, before acting on the information.
Digital advice software won’t clarify your goals and objectives and can’t account for changes in your circumstances, for example, if you have a break from work or increase your debt levels. As your circumstances can change over time, you should check the advice still fits your needs.
Paying for robo-advice
Robo-advice may have lower advice fees than traditional financial advisers. This may be an option for people who can’t afford full service financial advice, only have a small amount to invest, or have simple advice needs.
Advice may be charged on a fee for service basis, and/or a percentage fee of assets under management, if you choose to implement the recommendations. You may also be charged a subscription fee for ongoing services, including regular newsletters or updates.
If the advice you receive allows the robo-adviser to automatically adjust the asset allocation of your portfolio, you should understand when and why the rebalancing will occur. For example, will rebalancing occur quarterly or as soon as your portfolio strays more than 5 per cent from the original mix of assets? You should also be clear about any costs or tax liabilities associated with rebalancing your portfolio.
Financial decisions are important. If there’s anything you don’t understand, you should do your own research and seek further information to help you make an informed decision. For more information on robo-advice visit ASIC’s MoneySmart website.
Greg Medraft is Chairman of the Australian Securities and Investments Commission