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To robo-advice or not to robo-advice

Is this the right tool for you?

SANDTON – Financial advisors Warren Ingram and Craig Gradidge battled it out at the 2016 Money Expo over the weekend in a debate entitled ‘Man vs Machine: Why a financial planner trumps a robo-advisor’.

Ingram, who is an executive director at Galileo Capital, a firm of financial planners, was fighting the cause of the robo-advisor. Gradidge, the CEO of financial planning company, Gradidge-Mahura Investments, was defending the (human) financial planner.

“Robo-advisors enable the scaling of advice, which is impossible for a single financial planner or financial planning firm to get right,” Ingram argued.

“Robo-advice can’t yet give the same quality of advice as the best financial planners, but they are better than the bad average,” he said, suggesting that robo-advisors provide investors with a set of tools to navigate investment decisions, which is better than being sold a product by a commission-incentivised salesman.

Although not right for everyone, particularly for individuals with very complex financial planning needs, robo-advice provides helpful investment tools and advice for the average, R300-a-month-debit-order investor, Ingram explained.

“[Robo-advice] is not going to help you with the most complex situation, if you have a number of different requirements, it’s not there right now. But in the future, that is going to change. Technology and social media are starting to know you better than you know yourself, or to know you a lot better than one person can get to know you,” he argued.

Having said that, Ingram pointed out that it’s not only investors with small amounts who use robo-advisors. Personal Capital, a robo-advisor in the US, has an average portfolio size of R1.8 million.

You don’t know what you don’t know

Even if effective where you have simple financial planning requirements, Gradidge argued that even then, robo-advice “cannot help you manage the behaviour gap, which is the real reason investors don’t meet their objectives”.

“Robo advisors might provide you with the right asset allocation, but most people don’t achieve their investment objectives because of the behaviours they exhibit after they have invested,” Gradidge said.

He cited the Dalbar studies, which reflect that investors tend to underperform the average mutual fund because of their decisions to buy, sell and switch into and out of mutual funds over both short- and long-term time frames.

Robo-advice tools also currently rely on the information that clients provide, which can result in an outcome that is not necessarily best suited to the client since a robo-advisor “cannot tell you what you don’t know”, Gradidge said.

“What you get out is what you will put in and the stuff you miss might be more important than you realise,” he suggested.

“You may tell me you want ‘x’. My job [as a financial planner] is to interrogate ‘x’ and decide whether that is really what you want. You may have a financial planning need that you’re not aware of.”

Acknowledging that robo-advice tools are improving and will do more in future than they can do now, Gradidge nonetheless maintained, “Where we are now, I think it’s a bit too risky to trust a robo-advisor just yet”.

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