JOHANNESBURG – Most of the robo-advisors in the South African market will find it very difficult to survive, a newcomer has warned.
Lance Solms, head of Itransact, says products have to be as cheap as possible and firms will only be able to make money once they have attracted enough business. Most robo-advisors will likely struggle to achieve economies of scale and there will be casualties along the way.
The low-cost investment product platform has just become the new kid on the block with the launch of its own independent robo-advisor, ItransactGO.
Solms says as a larger investment platform, the addition of a robo-advisor is not the be-all and end-all for the firm, but a service it has added to its platform.
The number of robo-advisors in South Africa has grown quite considerably over the past two years, although some entrants effectively only offer a particular fund manager’s house view online. Yet, there have been suggestions that the rise of robo-advice could spell the end for conventional face-to-face financial advice in due course.
But Solms doesn’t believe this is currently a realistic prediction.
The investment world is still “light-years away” from computers taking over the role of humans and assisting an emotional investor with a will after the death of a loved one, he argues.
For the moment however, robo-advisors can evaluate the market very quickly, perform high-speed calculations and offer investors a solution tailored to their needs, he says.
The launch of ItransactGO comes amid efforts to break into the larger consumer market. The robo-advisor assists investors in compiling a suitable investment portfolio tailored to their goals, risk profile and personal circumstances by picking a handful of locally listed exchange-traded funds (ETFs) from a universe of 56 funds.
The robo-advisor doesn’t favour a particular asset manager or house view, will look across all asset classes including cash, bonds, property, domestic and offshore equities and automatically rebalances the investor portfolio.
ItransactGO is primarily aimed at financial advisors, self-help investors and financially disadvantaged investors.
Solms says because of cost pressure, a lot of financial advisors don’t want to assist smaller investors. The robo-advisor will complement the role of financial advisors and allow them to help clients over the phone while interacting online – thereby reducing the number of face-to-face meetings and costs.
The technology could also provide financially disadvantaged investors who cannot afford financial advice with the same tools and access to blue-chip institutional grade products, he adds.
But will South Africans be open to portfolios comprising only of ETFs in a market where actively-managed unit trusts continue to dominate?
Solms says it is a problem the firm has faced since inception – how to compete with a very established unit trust market.
“It is almost like the equivalent of a lightweight boxer getting into the ring with a heavyweight boxer. How do you beat the guy?”
Low-cost competitors have to employ a number of “guerrilla tactics”, he says. One of the reasons the firm has managed to grow its retail assets to R4 billion since it was established in 2010, is because it has shown financial advisors not to shop for brand.
He believes this trend will spread to customers in due course.
While some would argue that the total fees and charges for the services of the robo-advisor – a maximum of 1.14% per annum including VAT – might still be relatively high, Solms argues that investors “need to be careful about fees”.
A lot of companies don’t disclose their all-in costs. Investors should ask for a quote showing the Effective Annual Cost (EAC). This includes the investment management charge, the advice fee, the administration charge and any other fees. To allow for a like-for-like comparison, investors need to have a look at the bottom line charge, he says.