James Robinson Alexander Forbes Private Client Wealth
Robo-advice and the Fourth Industrial Revolution (4IR) are inevitable and will affect the financial industry sooner than we expect – but is it necessarily all good, asks James Robinson, Private Client Wealth Associate at Alexander Forbes Wealth.
What is the difference between robo-advisers and traditional financial advisers?
Robo-advisers are an online solution for investors which make use of algorithms to manage a portfolio based on a client’s personalised parameters. The client inputs their time horizon, risk appetite before a quick calculation gives the investor a choice of funds that suits their requirements.
More traditional, a personal financial adviser is a professional who will help manage aspects of your financial life, from investing to estate and tax planning. The more complex your financial situation, the more likely you are to approach a professional to assist with your needs.
Which option is better?
At first glance, the main advantage of robo-advice is the cost reduction. There is little to no human interaction in this process, which drives costs down. In line with the cost cutting measures of digital advice, the mandate of your portfolio will most probably be aligned to a passive index fund which tracks a predetermined index (such as The JSE Top 40). There is much debate about the advantages and disadvantages of these funds over actively managed funds.
Financial advisers have a role to play in order to earn their fee. Wealthier investors tend to have more complex finances that stretch beyond their personal investments, including their estate planning, trust planning, tax planning and their holistic financial plan which includes life insurance and the financial wellbeing of the client, their business and their family. This is where an approved Certified Financial Planner is crucial.
Clients are given the chance to take advantage of the continuous developments and opportunities in the industry which their financial adviser will assist in reducing their tax on income and at death, and ensuring their family is protected in the case of their death.
The human behaviour factors that also tend to influence our inherent biases should also be taken into consideration by a knowledgeable financial adviser versus the simple algorithm of a robo-advice approach.
What should I do about my finances?
If you are still young and single and looking to invest a small amount towards a simple goal like a first car or starting a retirement annuity, then robo-advice might suit you.
If you have acquired a fair amount of wealth and are starting a family or business, then your requirements will be increasingly more complex. In this case it is advised that you find a financial adviser you feel comfortable with, who is capable of helping you strive towards your future goals as efficiently as possible.