Users of ‘robo-advice’ need to ask some basic questions of the online services including whether the operators have appropriate qualifications and experience in the investment sector and if the fees are low enough to justify by-passing an adviser in favour of an automated service according to Morningstar.
In a research report from the group’s fund analysts released yesterday Morningstar stated that ‘robo-advice’ would continue to grow and investors should be asking who will be holding their funds and how will they be invested.
“The first questions anyone should ask are, who’s behind the pretty internet pages, where do the principals come from, what qualifications do they have and do they have a track record in the wealth management industry?,” the report said.
“Follow that with what is the asset allocation framework, who is putting it together and does it make sense? Then ask whether the fees are cheap enough to justify using a robo-adviser rather than an established provider.”
The report also urged investors to know what exit strategies were available in the event of an investment or manager failure and stated they limited certain risks and investment amounts so where not suitable for all self-directed investors.
Morningstar stated that despite the need to be cautious around ‘robo-advice’ – which it stated was a misnomer for the automated investment processes on offer – the sector would continue to grow in the coming year.
The research house stated that while ‘robo-advice’ was slated to manage US$255 billion worldwide in the next five years, US financial planners alone still managed US$5 trillion for clients and that many ‘robo-advice’ strategies relied heavily on exchange traded funds and cookie cutter approaches.
However Morningstar stated that even if the online offerings began to cannabalise some face to face advice clients “the main result may be that they attract people that otherwise would go elsewhere”.
“The ultimate aim is to offer a potentially powerful lure to investors who prefer a cheaper set-and-forget, technology-driven approach to managing their money. By slimming down the available options and providing sample portfolios based on objectives, firms can also restrict consumers’ poor investment decisions and misallocations.”
