For many people, “financial advisor” is a profession akin to politician or used car salesman.  However, these people (the ethical ones) do provide a valuable service to the public.  After meeting with clients to assess to financial situation and life goals.  The advisor can help their client to pay off a mortgage more efficiently, provide advice on minimising tax obligations or invest cash for the future.  Once the ‘invest’ decision is made, advisors will assess their clients risk tolerance and time horizons – then set about creating a portfolio of assets designed to meet their client’s financial needs.  The portfolio will typically include any mixture of bonds, stocks and gold.  Once the advisor places the bets, it is their responsibility to provide performance advice, adjust asset allocations over time and even help with taxation.  For this they earn a healthy fee.

Last year Robo Advisers came a knocking… What happens if you have already decided to invest?  Your house is paid off, you are in a strong finance position or you just dislike financial advisors because some come across as sales people.  It turns out funds management may not be a skill or art-form after all.  Like most occupations is a series of steps and decisions – a recipe with some basic math thrown in.  Perfect for computer.

RoboAdvisor

 

Pauline Skypala wrote in the Australian Financial Review “If most people’s investment needs can be taken care of by an algorithm, the investment industry could be about to suffer the sort of margin compression visited on publishing – worse even, given the extraordinarily high margins at stake”.  Pauline has summed it up pretty nicely and it is just a matter of time until the public accepts that computers can perform this function faster, cheaper and more accurately than humans.

But what does Pauline mean by “compressed margins”?  Wealthfront charges a flat .25% management fee per year with the first $10,000 of any portfolio being managed for free. On a $100,000 portfolio this comes out to only $18.75 per month for a completely automated solution. For comparison sake, $18.75 wouldn’t even pay for two stock trades at a big name broker.  That is margin compression.  Once robots take over, funds management becomes a commodity – like coal – where every tonne of it is identical (for practical purposes) so produces can only compete on price.  Funds Managers move from price makers to price takers…

So how many Robo Advisers are out there now: enough for website which track their performance to emerge… Review Forex Robots lists 37 individual Robo Advisors which trade foreign currencies.  ETF Watch Australia tracks 5 different ETF management Robots and predicts over 12 Robo Advisers operators from Australia by the end of 2016.

We like to put the robot cheer leader’s chestnuts in the fire here, but the truth is – the author of this article uses Robo Advisers.  I do it for the same reasons that many other turn to automation.  It is faster, cheaper and I believe it delivers better performance.  BUT that doesn’t mean I cannot feel something for the flesh and blood people whose livelihoods are circling the drain.  Robo Advisors are taking a toll on an industry already stung by the awesome force of computational power.  In 2015, the number of US Financial Advisors had declined for the previous 5 consecutive years.  Reuters cites an aging workforce, with nearly half of all advisors over the age of 55.  Sadly, these individuals will not be replaced and the current cohort of 285,000 active advisors will find themselves with financial problems of their own.