Pressure on financial advisers to do more

There’ll be winners and losers as ETFs cut costs.

Turning up to give a lecture in ­financial planning a few days ago, Adrian Raftery entered the classroom to find nobody there ... not a single student from Melbourne’s Deakin University turned up for his estate planning unit.

Furious with the no-show of an entire class, Dr Raftery took to ­social media to berate this mob of would-be financial advisers for not turning up to the 8am unit — it’s a tale for our times.

But actually, it’s not a tale about lazy students; rather, it’s about the huge changes happening in financial advice. Yes, no doubt some of those students simply stayed in bed, but it’s a reasonable bet others are reassessing just what financial advice may mean in the future and what sort of a career it might offer.

The role of the financial adviser is being turned on its head as the idea of what we loosely call robo-advice comes into its own, thanks to the fusion of two powerful forces — internet-enabled services and low-cost exchange traded funds (funds based on an index such as the ASX 200 or S&P 500).

We already know that customers don’t want to pay for routine advice. Now, with vignettes from university life and endless evidence that financial advisers themselves need to do more important work (such as understanding the new super rules), we also know financial advisers realise they must offer a lot more than off-the-shelf suggestions as so-called robo-advice takes off.

The replacement of white-­collar services by automated digital services will surprise every profession: this week the very successful software group Xero announced it was moving into artificial intelligence services in accounting. Soon we will see similar attempts to replace the routine work of lawyers, quantity surveyors and a host of similar professions. Nothing is safe, including financial journalism — there are advanced auto-reporting services now offered out of India offering passable uninterpreted versions of company results.

However, it is financial services — and specifically financial advice — where robo-advice is going to make the most progress because of the vast amounts of money at stake and the relatively prosaic nature of much communication: The arrival of ETFs on the market has accelerated the process.

An investor might test whether this robo-advice model suits them by placing, say, 10 per cent of their share portfolio on Wall Street’s Nasdaq index to get exposure to the tech titans that are driving the US recovery. A more advanced move would be to hand entire portfolio or super funds to a group that offers a cut-price solution heavily dependent on ETF products — Chris Brycki at Stockspot is a pioneer of the industry.

More recently Mr Brycki has been joined a by a string of interesting outfits such as Spaceship, a high-profile robo-adviser with a focus on technology investments, Grow Super, which is offering a cheap way for the retail investor to access the Dimensional indexing services and a string of related names.

As the money flows change and the nature of key financial service roles do too, there is intense debate across markets on passive versus active investing. For now passive investing is winning — the amount of money that flowed into ETFs in the first six months this year was more than the last two years combined.

We are going to see winners and losers in this new game; here’s the best and worst of it.

You don’t believe you can win: The essential proposition of robo-advice is that you don’t pay much and you stay with the herd. In many ways an investor who goes heavily into this area is giving up and accepting that ordinary returns will do. In many ways this could be good enough for a segment of the investment population. You may not want to be “active” for many reasons: you don’t understand how it works, you don’t care enough about how it works to find out, you have better things to do with your time.

You are happy with average returns: This is not as simple as it sounds — average returns are gained from including absolutely every stock in the market. From a financial perspective, you are putting money with companies you may not have confidence in. From an ethical perspective, it’s the equivalent of investing blindfolded; the worst pollutants or companies harbouring charlatans and suspected frauds will get some of your savings.

You want to access lucrative but difficult areas: An ETF is a very good way to place money in a market that you could not reasonably access as a private investor — this might be regional such as Wall Street tech stocks (through Nasdaq) or European banks (which are seen as recovery opportunities just now). They also work very well as a way to access difficult areas such as gold or emerging markets (where active managers traditionally all chased the same handful of companies).

You are willing to pay fees to lose money: Paying someone else fees to lose money is always a lot more unpleasant than losing money because of your own decisions. When markets fall, you will be paying fees to someone to lose money for you (perhaps the fees will be lower, but you will still have to pay them).

You are a ‘set and forget’ investor: A serious problem for long-term investors is that the very nature of the “top stocks” in any market will change — the same goes for active fund managers. An ETF does solve this important issue — the top 20 stocks will change beyond recognition over the decades but an ETF based on top stocks is constantly adjusting its constituent parts, which covers individual investors from having a portfolio that becomes out of date.

You hate paying high fees: The more successful the robo-­advice model the lower the fees go. The extraordinary progress of the Vanguard group and its ability to offer lower fees as the funds under its management expand is a good example of this trend. Fees are going to much lower from here for both robo-advice and ETFs.