Automated advice feasibility

Robo-advice is currently a hot topic in financial services, but how does this extend to SMSFs? Daniel Paperny explores the growing appetite for automated advice among SMSF trustees and why it is regarded as an increasingly feasible alternative.

Automated advice offerings and SMSF trustees appear to be strange bedfellows. Greater control, transparency and lower fees compared to traditional advice models are all benefits that increasingly autonomous investors are seeking. With growing interest from traditional banking incumbents, the momentum behind automated advice is not abating just yet. However, industry consensus suggests the current robo-advice offerings are still limited in their scope, as well as their ability to interact with a client, so what’s in it for SMSF members? Where is the appeal for the present pool of digitally astute SMSF investors who have decided to forego the traditional adviser and client relationship in favour of a cost-effective but potentially less personalised alternative solution?


The Australian Securities and Investments Commission (ASIC) defines automated advice – also known as digital or robo-advice – as the provision of financial product advice using a variety of algorithms and technology independent of a human adviser. This can be either general or personal advice, ranging from advice that is narrow in scope – such as portfolio construction – to that which is more sophisticated and comprehensive.

The provision of digital advice has accelerated rapidly in Australia since 2014, with ASIC noting a number of start-up and existing Australian financial services licence (AFSL) holders developing digital advice models in its “Regulating digital financial advice” consultation paper released in March.

“Most advisers offering traditional financial product advice limit the scope of their advice and communicate the limited nature of this advice through conversations with their clients,” ASIC’s consultation paper states.

“In a digital advice context, however, such conversations are not possible because no human adviser is involved in providing the advice.”

ASIC’s consultation paper set forth a proposed regulatory framework for digital advice and came months after a joint report conducted by Ignition Wealth and FinDigital last year, which presented a series of findings on the state of robo-advice in Australia and its projected forecasts for growth over the coming years.

Examining 45 different automated advice services across Australia, the “2015 Automated Investment Advisers Global Market Review” found SMSF trustees were likely to be early adopters when it came to using automated advice solutions, particularly due to the growing appeal of automated advice among affluent investors aged 60 and over.

Ignition Wealth, whose own data is provided by Lonsec Research, launched its Teams robo-solution for advice practices and accounting firms earlier this year, with the platform also available as a fully adaptable, white-label automated advice technology stack, allowing institutions to customise it according to the requirements of their client base.

Its chief executive, Mark Fordree, notes a growing trend of Australian investors who have SMSFs deciding to opt out of their more traditional relationship with an adviser because they want to oversee it themselves.

“Our data tells us that a majority of SMSFs are highly undiversified and have very high cash balances. Our research further tells us that the majority of these people want to do it themselves, but they don’t have the tools,” Fordree says.

“Part of what we’ve delivered is an opportunity for a trustee of a fund to generate a highly diversified global portfolio in the asset classes that a trustee deems appropriate, but in an entirely independent way. We’re not pushing a product, there’s no commission and no kickbacks, we only charge an annual fee to access the system and the client can opt in and out at any time.”

From a definitional standpoint, it seems tempting to conclude automated advice offerings are, by their very nature, slanted towards the market-savvy self-directed investors who are turning away from having conversations with traditional financial advisers. However, this is not entirely true.

Funds and flexibility

SMSFs are often chosen because they allow a higher degree of flexibility and control over the funds’ assets, however, this tends to make advice for trustees more complex, particularly as advisers are often called upon to help ensure the SMSF structure is one that is appropriate for the members.

Conversely, robo-advice offerings today generally operate within the domain of more simple advice topics such as investment switching, with the more complex topics escalated to an adviser.

This is why for Midwinter’s managing director, Julian Plummer, robo-advice for SMSF trustees should be regarded as an adjunct to a traditional financial adviser and not a replacement.

From a regulatory standpoint, SMSFs are kept in check by the ATO, meaning they are not eligible for intra-fund advice and are required to conduct a comprehensive ‘know your client’ process when providing advice.

Plummer says this casts a shadow of doubt over providing SMSF trustees simple investment advice using a robo-advice offering, particularly with the onus of having to ensure the advice provided is consistent with the investment strategy.

As a result, standard Australian Prudential Regulation Authority-regulated superannuation funds possess an “almighty advantage” in being able to provide inexpensive advice quickly, he admits.

He points out a full fact find and ‘know your client’ process conducted over a tablet or mobile phone would inevitably present a significant hurdle for a compliant robo-adviser.

“I don’t think providing straight-through transaction on a model portfolio of shares is going to cut it, particularly if the trustee or member accidentally chooses an investment or model portfolio that does not comply with the investment strategy of the fund,” he says.

“The only way we see this working is through a comprehensive digital advice framework, with fully fledged financial planning that understands the SMSF’s investment strategy and has a full understanding of the member’s financial situation, in addition to allowing escalation to a trusted SMSF adviser.”

Midwinter is no stranger to robo-advice, having conducted an extensive survey on the topic with 288 advice professionals and over 65 licensees last year prior to launching its Digital Advice Framework solution in April. The framework taps into its existing AdviceOS infrastructure, with Midwinter looking to integrate its platform with select robo-advice providers using API technology.

According to Plummer, however, a key limitation of robo-advisers for SMSF investors is that they would need to consider the risk profile and needs of each member as well as the other assets of members – including exposure to property, and local and overseas shares.

“What about the tax implications when considering selling investments or switching products? If the risk levels of each member are different, should the assets in the fund be segregated to members’ accounts?” he says.

“We have gone from a relatively simple advice journey for a standard superannuation fund to a more complex advice journey for the SMSF, in particular with multiple members and with the potential for a mix of segregated and unsegregated assets within the SMSF … having a trusted adviser with experience in the administration and management of SMSFs is therefore crucial.”

Why go for robo?

Stockspot CEO Chris Brycki identifies three main advantages SMSF trustees using automated advice offerings enjoy over managing their own investment strategy.

Brycki says Stockspot’s own offering functions by automating many of the jobs SMSF trustees would need to do to effectively manage their investments, saving trustees’ time and the need to actively follow markets. According to Brycki, robo-offerings also help trustees avoid behavioural mistakes, which is a trap he’s identified that many SMSF investors fall prey to when given full control of their investment decision-making.

“Whenever clients’ personal circumstances change, we review their investment strategy to ensure that it stays relevant,” he says.

“Many self-directed investors ignore these changes, which is why many SMSFs took on too much risk going into the global financial crisis and their investment strategy wasn’t consistent with their time frame or risk appetite.”

Finally, he says his firm reviews investment recommendations “at least annually” in an approach he says decreases the likelihood of “bad surprises” for clients arising as they approach retirement.

“The value of behavioural guidance and the benefits of automation make investment services like ours a great alternative for those less interested in being actively involved,” he says.

The lion’s share

If the mood among traditional financial services institutions and banking incumbents is a good indicator of the technology’s growing potential, then robo-advice certainly seems to be gaining traction. In the past year alone, ANZ, AMP, National Australia Bank and Macquarie’s Owners Advisory have trialled the technology and come forth with their own approach towards adopting automated advice into their existing service offerings.
The Owners Advisory offering represents a departure away from the fund-of-fund model and exchange-traded-fund (ETF)-driven investment portfolio mixes that dominate many of the robo-advice products in the market today.

This is achieved by a model that requires customers to outline all their current holdings and preferences for asset allocation, in addition to investment return expectations, which are analysed by Macquarie’s portfolio managers who run model reference tests to help provide advice that does not favour particular stocks or sectors.

Its founder, Macquarie chief investment officer John O’Connell, says the offering was built on a rules-based engine that draws on FinaMetrica’s risk profiling to customise a client’s solution “all the way down” to their individual set of circumstances, perspectives and preferences.

“Robo-advice technology can mean a very large structural shift in terms of the costs of the supply chain of advice; that’s really what it changes – not quite the advice itself, but the cost of the supply chain,” O’Connell says.

“When I first sat down to have that initial discussion with Macquarie Group chief executive Nicholas Moore I told him I thought this could change the industry for the better.

“I honestly believe you’ve got the technology and ability now to customise down to every individual person’s circumstances and that should really revolutionise the industry and make it a more robust and better industry for people at an affordable price point.”

Where to from here?

A global report commissioned by Deloitte on automated advice last year, titled “Robo-Advisors: Capitalising on a growing opportunity”, argued we have only witnessed the beginning of what automated advice could become.

“Big data and advanced analytics have the potential to broaden the scope of robo-advice dramatically, incorporating financial planning into broader retirement, health and wellbeing, and enabling quasi-institutional research,” the report concludes.

“Robo-advice could then impact all investor segments, not just the mass-market and mass-affluent retail investors.”

Plummer believes if robo-advisers are serious about wanting to increase their funds under management, then SMSFs are going to be a key target moving forward.

“What’s more, robo-advisers who offer a simple risk profile-matched ETF portfolio will be a compelling choice for SMSF trustees who want to use a robo-advice service to build a solid, core investment portfolio at a very low cost,” he says.

Fordree added the application of automation can be explored in other areas – such as insurance and debt – and shouldn’t be limited to wealth management, particularly given robo-advice was still in its infancy both here and abroad.

“Even though there’s dozens and dozens of robo-advisers, this is a very early industry in Australia,” he says.

“I think a lot of it is going to come down to the best interests of the client and not having an allegiance to a single product manufacturer. That may be a key element in what the landscape looks like in three or four years.”

With automated advice offerings continuing to become more intelligent and providing intuitive, cost-effective customised solutions, the message for trustees seems loud and clear. Perhaps autonomy really can be achieved through automation.

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