RateCity.com.au
powering smart financial decisions

Robo-investing: would you trust a robot with your cash?

Robo-investing: would you trust a robot with your cash?

While robo-investing hasn’t taken off in Australia the same way it has in America, it seems to be a matter of time.

In fact in 2014, Oxford University predicted there was a 58 per cent chance financial advisers as we know them today would be replaced by robots in the future.

Automated investing is seemingly an inevitable progression but how safe is it really to entrust your money to a robot? Unfortunately there’s no hard and fast answer to this question with experts endorsing both sides of the argument.

RateCity has compared some of the pros and cons of handing your hard earned cash over to a robot to invest to help you make an informed decision.  

Pros

Beginner friendly

One of the most attractive things about robo-investing is that absolutely no financial expertise is required in setting up an investment portfolio. Instead, users only have to answer questions about their personal finances and what level of risk they are willing to take to be matched with the “best” portfolio for their needs. It is also easy to invest small amounts with some companies requiring as little as $5000 to get a new user started and waiving annual fees for smaller investment amounts. This can make robo-investing a more financially feasible option to beginners who could be ignored by some financial advisers.

Less fees for more services

As there is no face-to-face interaction, extra services such as rebalancing your portfolio and accessing reports on the performance of your investments are generally provided for free. Where traditionally you would receive a report from a financial adviser periodically, robo-investing websites allow you to constantly monitor your progress online for no extra fee. Similarly, if your portfolio needs to be rebalanced to continue optimised performance there is no extra charge.  

Reduces emotional decision making

One of the biggest risk factors relating to an investment portfolio can be you. Investors with a tendency to respond to situations, such as stock prices falling or business announcements, in an emotional manner risk losing valuable assets. Robo-investing takes care of this by removing any human emotion from the equation and instead reducing the decision to a calculation.  

Related links

Cons

Nothing comes for free

While it may seem as though there a virtually no fees involved in this form of investing that’s not quite the case. Although, in some instances, you can invest up to $10,000 without incurring annual management fees you will still be charged a percentage of your earnings and fees associated with investing in Exchange Traded Funds which can be approximately 0.25% – 0.31% per annum. Once you start investing large sums these fees can really add up so it’s important to consider what you will be paying in the long run before signing up.

Flaws in optimisation

Another con is that many robo-investing companies rely on an optimisation equation that continually rebalances your portfolio to ensure the least risk and agreed return. Although this system is not a new investing concept the method in which it is done can have some flaws that detract from the accuracy of results. For example, if the optimisation relies on historical data it risks not having the advantage of forward-thinking and instead assuming the market will perform as it has previously. Similarly, some robo-investing sites don’t take into account previous assets held by investors as a traditional financial adviser would which limits how holistic the advice you receive can be. Learn as much as you can about how your chosen robo-investing site manages their portfolios before you commit to joining.

Robo-investing won’t be the most appropriate strategy for all investors and it’s up to the individual to decide how to handle their funds. For the more experienced investor who already has assets behind them, the advice provided to them may seem to general or basic. For the beginner investor looking to dip their toes in the market robo-investing could be the way to go. As with all investments it is important to do your research beforehand and understand who is behind the site, how the investment portfolio is chosen and what you will be charged for the service. 

Realted links

Did you find this helpful? Why not share this article?

Advertisement

RateCity
ratecity-newsletter

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.

Today's top savings accounts products

Advertisement

Learn more about savings accounts

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Do banks run credit checks on savings accounts?

When you apply to open a new savings account, some providers may conduct a credit check, meaning that they will ask a credit bureau for your credit history. This isn’t always the case on savings accounts though and depends on the provider, as you aren’t borrowing money. 

As you are opening a savings account and not borrowing funds, this credit check is considered a soft inquiry and should not affect your credit score. If the bank has run the credit check, you can often still open a savings account even if you have a poor score, provided you meet other requirements. 

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Do I have to claim interest on my savings account?

When you lodge your income tax returns, you must include in the documentation all your sources of income, including bank interest. Your bank will report any interest you earn on the funds in your savings account to the Australian Tax Office (ATO). When the ATO then compares this information with your tax returns,  you also need to have mentioned the interest earned. If there is any discrepancy, you’ll receive a letter from the ATO. 

Avoid this situation by ensuring you receive your bank statement with interest noted. Then declare the interest in your tax returns and pay the tax that’s applicable based on the income tax rate.

You only need to claim your share of the interest earned for joint accounts. If you manage an account for your child and receive or spend money via this account, you will also need to report any interest earned from said account.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.