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.  

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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. 

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Learn more about savings accounts

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

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 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.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

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.

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 direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

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. 

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.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.