In recent years the popularity of Robo-Advisors has continued to grow. As investors have become increasingly frustrated with the relatively high costs associated with traditional financial advice and a continued period of underperformance, many are looking at different investment options.
Robo-Advisors, which are automated investment platforms that have minimal human intervention, are continuing to grow in popularity.
A recent report by Investment Trends has shown that 22% of the online share investor population in Australia are aware of robo-advisors. This is the same level of recognition that we see in other countries such as the UK, where there is a rate of recognition of 23%.
Robo-advice is clearly the most prominent in the United States. Where 39% of the online share investing population are familiar with the concept.
The world of robo-advice started in the US almost 10-years ago, when Betterment burst onto the scene at a time when investors were becoming disillusioned with the underperformance and high costs of managed funds. Betterment has now grown to the point that they have more than $10 billion of assets under management.
Over the last 10 years, there has been a continuous flow of funds into passive strategies and many investors are now prepared to utilize the low costs and ease of a robo-advisor. Traditionally investing in a managed fund has seen financial advisors receive trailing commissions which can be as high as 2 or 3% of total assets. Robo-advisers are able to offer similar asset allocation strategies, and many operate with costs of less than 0.25%.
Recep Peker, Research Director at Investment Trends believes that there is still plenty of room for more uptake in the Australian market.
“The Australian financial services industry is ripe for disruption, as more and more investors take notice of digital advice solutions as an alternative to traditional advice models,” said Peker.
“Many Australian online investors tend to see themselves as early adopters of innovative solutions, so there is little surprise to see rising awareness and adoption of providers such as Acorns and Stockspot.”
Peker also suggests that we should look to what has happened in the US to gain a better understanding of the potential upside in robo-advice in Australia.
“Our research shows widespread adoption of robo-advice in the United States, with 1.6 million American online share investors now using these solutions, up almost two-fold in 2017 alone. This paints an optimistic picture of the potential for mainstream adoption of robo-advice here in Australia,” said Peker.
A Young Man’s Game
One of the key insights from the Investment Trends Report was that it is clearly millennials that make up the highest percentage of users. Overall, it is the younger and less wealthy that have adopted robo-advice the most.
Interestingly, 36% of online share investors aged 65 or more, said they would consider using a robo advisor. While 40% of those aged 55-64 were also more than happy to look at using a robo-advisor.
Peker believes the eagerness for new investment options stems from the fact that many Australians are unsatisfied with the current nature of financial advice.
“The significant interest in robo-advice reflects a growing population of Australians with unmet financial advice needs. Many Australians, young and old, want professional help to achieve their lifestyle goals and improve their financial situation, and many believe that robo-advice solutions can help them along this journey,” said Peker.
“While current robo-advice users tend to be younger and less wealthy, the demographic profile of those interested in using robo-advice closely matches the broader investor population, highlighting a key opportunity for robo-advice providers,” he said.
Room For Improvement
Despite the strong uptake in the use of robo-advice in Australia and worldwide, many investors still feel like they require more of a human touch. Many are still concerned about the fact that they are handing over control of the majority of their net worth to a strategy that contains little or no human intervention.
One of the key findings from the report was that 68% of people said they would only trust robo-advice if there was some degree of human-based follow-up. Whether that was by telephone, email or live chat.
While the actual asset allocation strategy can largely be automated by using robo-advisors, it is the human element in the planning and advice stage that is difficult to replace.
“Building trust is vital to the success of robo-advice providers, and good customer service is the first step towards fostering trust,” said Peker.
For the robo-advice industry to continue to grow, they will need to see a larger uptake from older, wealthier investors and retirees. And overall this group of investors requires a more hands-on approach than what many online platforms in Australia currently offer.
“While younger potential users are more likely to trust and implement a recommendation without the need for human involvement, a multi-channel customer support is vital to get older investors over the line,” he said.
Investment Trends Robo-advice Report
The Investment Trends Robo-advice Report uncovers the adoption of robo-advice services among current online investors across the globe. The Report is based on detailed online surveys completed by over than thousand investors across 8 key countries between February and December 2017.