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A new form of financial advice

Peter Arnold   |  05 Jan 2015Text size  Decrease  Increase  |  

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Peter Arnold is the Asia Pacific Copy Editor at Morningstar.

Wealth advice and how it is delivered is changing and technology is helping introduce a range of new options for investors.

Research done by Oxford University's Oxford Martin Program entitled "The future of employment: how susceptible are jobs to computerisation?" states that in future, artificial intelligence will be able to offer personalised financial advice on a larger scale and at a lower cost. It also predicts that financial advisers have a 58 per cent chance of being replaced by computers.

There has been a change in thinking about the way financial advice can be delivered which has given rise to so-called "robo-advisers". While the name is a sensationalistic misnomer, they do offer automated services such as risk-tolerance assessment, asset allocation, fund selection, rebalancing and in the US, automatic tax-loss harvesting.

The rise in the US of platforms such as Wealthfront, which recently became the first digital wealth manager to reach US$1 billion in assets under management, and Betterment has prompted the likes of Charles Schwab, Vanguard and Fidelity to respond with the development of their own low-cost advice platforms, while in Australia, Stockspot is trying to get first-mover advantage in the space, offering automated portfolios of ASX [Australian Securities Exchange) exchange-traded funds.

A report by independent Swiss research firm MyPrivateBanking predicts that in the next five years, robo-advisers will be managing US$255 billion worldwide. But while that is a small fraction of what traditional managers control globally, with more than US$5 trillion in the hands of US advisers alone, it does show how fast the platforms are expected to grow.

Its report on 14 robo-advisers, eight in the US and six in Europe, found that “among them there's considerable variety when it comes to investment strategies – though it is true to say that many of them use passive ETFs as their main investment vehicles”.

Charles Schwab's plan for its Schwab Intelligent Portfolios in the US – pencilled in for launch in the first quarter of 2015 – is to not levy fees such as commissions, instead making money through its own ETFs that clients put in their portfolios.

Vanguard last year rolled out Personal Advisor Services in the US at a flat fee of 0.30 per cent for a human adviser, albeit one dispensing cookie-cutter advice, that it hopes will be attractive to low-balance investors in the retirement market. Fidelity recently partnered with Betterment to offer "white-label" portfolio management that allows advisers to put their clients into Betterment portfolios and take the credit.

For the bigger firms, cannibalisation is a potential risk as some current clients move to the cheaper alternative, though the main result may be that they attract people that otherwise would go elsewhere. The ultimate aim is to offer a potentially powerful lure to investors who prefer a cheaper set-and-forget, technology-driven approach to managing their money.

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