12 May 2017

Robo-Advice vs. Human Adviser

Automated financial advisers, also known as Robo-Advisers, are taking a growing share of the market for financial advice and planning. Lower cost and easy access are the main factors behind this trend.

Traditional Advisers argue that they are the only ones that can give personalized advice on complex problems.

But even the most complex portfolios can be handled without resort to high fees.

Let's see what complex issues may face the average - and even high-net - investor: in most cases they are related to Estate or Retirement Planning - but they can easily - and more expertly handled by tax experts (or accountants or lawyers with relevant qualifications). These professionals will not charge an ongoing fee based on the value of your asset but a fee based on an hourly rate schedule. On an estate of $US 5 million and up this should be substantially cheaper. A 1pct annual management fee would total $50,000 PER YEAR!

This leaves the question of HOW your wealth should be invested, first of all the basic asset allocation (property, shares, bonds etc). To a certain extent automated models based on questionnaires should go a long way to provide the answer. It may not be precise, it may even not be the best choice in hindsight but remember: all recommendations by human advisers may also not work out exactly as hoped for (to put it mildly).

My solution to this dilemma is as follows: put a large part of your wealth into the asset structure that is recommended by the Robo-Adviser and put the rest of your wealth into the hands of carefully picked human portfolio managers. Make sure that they charge reasonable fees (expensive does not guarantee better performance!) - preferably with a well-structured performance component.

Traditional Advisers vs. Robo-Advisers