The Financial Markets Authority has given the go-ahead for personalised advice to be offered online. Such advice is referred to as ‘robo-advice’. Under current legislation, personalised investment advice can only be given by certain categories of advisers in accordance with the Code of Professional Conduct for Authorised Financial Advisers. From 2018, there will be an exemption which will allow personalised advice to be given electronically, however the advice given must meet the same standards that apply to Authorised Financial Advisers.
So what does this mean for investors? The principal advantage of robo-advice is the low cost. Human involvement is limited to designing the tools and algorithms that are used to provide advice. These tools can then be used directly by clients without the need for a person to be involved in the advice process. Clients using a robo-advice service will answer questions about themselves online to provide the information an adviser would normally collect. This can include information about assets, liabilities, income, expenses, family circumstances, working life and retirement goals, attitudes towards financial risk and so on. The on-line systems will then use built-in logic to make recommendations to clients based on the information provided. This could potentially include advice on how to pay off debt, how to manage income and expenses and how to save for retirement. However, initially the focus will no doubt be on setting up investment portfolios, including KiwiSaver. Clients will receive a recommendation on how best to set up their investments to achieve their goals. They will then be able to invest funds in the recommended portfolio, and the portfolio will be automatically managed to optimise the investments. This service will be of particular interest to clients with smaller portfolios and clients with a good understanding of investment markets who prefer a DIY approach.