Self-managed super fund trustees are used to taking control of their investments. Yet with the so-called "Fourth Industrial Revolution" now putting artificial intelligence and robotics into virtually every industry, is it time for SMSFs to let the robots take charge?

Firstly, a definition: "robo-advice" is described as a tool providing automated algorithmic-based advice, such as listing investments that can achieve a certain outcome, drawing upon variables such as a person's age, income, and time to retirement.

Proponents such as Six Park describe robo-advice as the "democratisation of investing," making SMSFs more cost-effective and accessible to pre-retirees with as little as $150,000 to invest.

The robo-adviser says SMSFs can use its service to help diversify their investments at low cost via ETFs, covering a range of asset classes including domestic to international shares, bonds and infrastructure.

This is despite research by SuperConcepts and the University of Adelaide that nominates $500,000 as the optimal amount needed to establish an SMSF, with smaller balances considered lacking diversification.

Others suggest using robo-advice to build a core investment portfolio based on ETFs, with the remainder potentially invested in direct equities.

SMSFs can potentially benefit from such "robo-investing," as well as those robo-advisers that provide a more comprehensive service to build a financial plan, incorporating such areas as insurance and salary sacrificing.

Robo-advice can benefit advisers too, by providing access to sophisticated tools and allowing for a potentially better customer experience compared to traditional models.

Mafematica's "Robo-Advisor" offering provides projections of future income and SMSF balances, allowing trustees to estimate retirement income based on a specified investment portfolio.

Yet even robo-advisers urge SMSF trustees to seek appropriate professional (read human) advice concerning complex areas such as administration, tax, and retirement planning.

The wide range of client scenarios associated with SMSFs can also present obstacles for robo-advisers in attempting to automate certain services.

Liam Shorte, an SMSF specialist adviser and Verante director, sees a role for robo-advice in certain areas, particularly in data analysis and benchmarking.

"I can certainly see a position for robo-advice in helping trustees working out the cash flow needs of their members and designing portfolios to meet those needs," he said.

"For example, allowing a trustee to educate themselves on the normal living expenses and overall budget of other retirees in their preferred lifestyle bracket and then designing a portfolio from the best available products to meet that target income for life, which will include deferred annuities in years to come."

Shorte also points to robo-advice aiding with compliance, in ensuring deeds are updated, investment strategies are current and compliant, and key statistics are available to trustees.

"The true power of robo-advice will be in the provision of data analysis, guidance, and benchmarking using data mining of the SMSF population," he said.

Human element

Nevertheless, Shorte says robots will not be taking over just yet due to the essential human factor in client interaction.

"When it comes to the nuances of coaching people how to prepare for retirement and the use of salary sacrificing combined with super splitting, and say recontribution strategies or selling assets to boost superannuation balances or plan debt reduction at the right times, I think the face-to-face adviser will remain the prime source of guidance," he says.

Shorte says this is because while most people aged below 50 have experience with compulsory super contributions and possibly salary sacrificing, strategic areas require more knowledge, such as catering for blended families in estate planning and transitioning to retirement.

"Robo-advice will struggle to help in these areas, as often the client does not know themselves what to ask or what they need from the robo-adviser. I see this everyday as I coax crucial information from new clients … with online or self-filled questionnaires they often hold back personal details or feelings that are essential to understand when designing a strategy," he says.

This is particularly the case when dealing with sensitive issues such as divorce, death benefits, and other life events, Shorte argues.

While aware of the rise of the machines, the advisory industry overall appears to be lagging in applying robo-advice.

A recent survey by Netwealth, "AdviceTech Research Report 2017," found that 38 per cent of advisers consider managed accounts and robo-advice will have the biggest impact on the advisory industry over the next five years.

Yet despite the finding, 97 per cent of those surveyed were not using robo-investment technologies for their clients' super and investment portfolios.

For SMSFs, the future appears to be a balance between using the best tools of robo-advice and robo-investing while relying upon human advisers for more complex matters.

After all, would you share your deepest needs and emotions with a machine?

More from Morningstar

• Why you need to unlearn time

• How investors can overcome their worst enemy

• Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.