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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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Disclaimer
This article is over two years old, last updated on January 8, 2016. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent savings accounts articles.
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