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Solving the biggest problem with traditional financial advice

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Should I put more money into my superannuation or into my mortgage?

It’s one of the most common financial questions. But, if you go to a financial adviser to find out, you could be set back $3,000.

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For financial advisers, regulations mean they’re often unable to provide this sort of advice without providing a 60-odd page statement of advice with a fee of up to and beyond $3,000, the chairman of the Australian Government Financial Literacy Board, Paul Clitheroe said recently.

That means that an ordinary Australian with a $10,000 windfall could still be stuck outside of advice.

“We’ve got this vast block of Australians who are unadvised and they can’t be advised because an honest adviser must say: ‘I must charge you $3,000 in hourly fees to get your statement of advice, 62 pages, done to the depth that I must do to give you decent advice,’” he said at a recent event in Sydney with investment platform, InvestSMART, which he also chairs.

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He said the top 10-15 per cent of earners can afford to pay a really good adviser, but for a lot of Australians the question is: “Where do they go?”

The problem only deepens as questions move beyond super vs mortgage and into retirement funding; fund managers can be expensive too.

That’s where robo-advisers come in…

As financial advice delivered online, robo-advice uses technology and algorithms instead of a human financial adviser.

Generally, users will provide personal details like age, gender, income, financial goals, assets and risk tolerance. Then, it will provide you financial advice based on these details.

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Often, your robo-adviser will have an investment capability, so the adviser will suggest a portfolio of investments and the next step is implementing the advice given.

However, your superannuation fund may also provide robo-advice for people with questions about how to optimise their super or investment options.

“I get the robo-advisers,” Clitheroe said.

InvestSMART doesn’t consider itself a robo-adviser, but the chairman of the financial literacy board’s support for the technology was strident.

“I’m finding people are really, really struggling and I can see a robo-adviser, if they were sitting here, they’d say “Look, at least we basically ask three questions. We ask, ‘How old are they? How much risk are they willing to take on? And how long is their investment span for?’

“They’re three perfectly valid questions, so you could well argue that that’s probably part of the evolution to something better.”

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Robo-advice forecast to grow 43 per cent per annum for the next 5 years

Adviser rating and customer review service, Adviser Ratings launched the first robo-adviser register in October, in the hopes of opening advice up to a much wider audience.

“The fact that only 14 per cent of Australians receive advice despite the large majority needing assistance with their finances demonstrates a huge unmet opportunity,” Adviser Ratings CEO of wealth, Mark Hoven said.

“We believe the digital financial planning world can start to bridge this gap.”

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In fact, around the world, robo-advisers’ assets under management are set to grow 43 per cent p.a. for the next five years to reach $5.8 billion by 2022, according to statista figures.

This has a lot to do with robo-advisers relatively cheap fees, the CEO of the peak superannuation body ASFA, Dr Martin Fahy noted.

He argued robo-advice has the power to “make advice ubiquitous and pervasive” while bringing it to market at a cost and level of adoption much greater than face-to-face advice.

That’s great, but who offers robo-advice?

Six Park

Six Park’s investment philosophy is to build a well-diversified passive and low-cost portfolio, which it regularly reviews and rebalances if needed.

Their investment team considers robo-advice to be the mixture of expert insight from investment professionals, coupled with automation and algorithms to allow more Australians access to investment management.

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Fees and minimum investment:

They have a minimum investment amount of $10,000 but offer reduced fees for larger portfolios over $200,000.

A standard account with between $10,000 and $199,999 comes with a 0.5 per cent fee per annum.

Clover

Clover describes itself as “your personalised investment adviser” and boasts “Nobel Prize-winning investment principles”.

Investors also have the option to opt-in for Socially Responsible Investments, meaning they’re investing for social and environmental impact in addition to financial return.

Sounds good, right?

Fees and minimum investment:

For accounts of $2,500 to $10,000, clients pay $5 plus GST a month. Once clients’ account balances reach $10,000, a 0.65 per cent plus GST fee is charged yearly.

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However, as account balances grow, the management fee drops to 0.45 per cent a year for those with at least $500,000.

Stockspot

Founded in 2013, Stockspot wants to rid the wealth management industry of jargon-heavy, time-consuming and expensive strategies.

Their investment philosophy has several prongs prioritising low fees and a patient approach to investing.

“Asset allocation drives the majority of portfolio returns and risk so it’s vital to get that right first,” Stockspot said.

“Low cost index funds provide superior after-fee returns to actively managed funds engaged in stock picking or market timing.”

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Fees and minimum investment:

Their fees are among the lowest, with a flat $5.50 charged pre month for those investing less than $10,000.

Once clients have between $10,001 and $2.5 million, fees range between 0.033 per cent and 0.055 per cent per month.

They put their ability to offer such competitive fees down to their index investing approach.

QuietGrowth

This robo-adviser allows investors with portfolios as small as $2,000 to invest and argues it offers the same thing as a high-quality wealth manager when it comes to building a customised portfolio mix for long-term investing.

Fees and minimum investment:

For portfolios between $2,000 and $10,000 QuietGrowth doesn’t charge annual fees. However, for portfolios between $10,001 and $200,001, fees range between 0.4 per cent and 0.6 per cent a month. The first $10,000 is still exempt from fees.

QuietGrowth rebalances portfolios where it sees a fund has moved from its target allocation. Portfolios with less than $10,000 won’t be rebalanced.

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I just want to know whether to put my money into super or my mortgage!

If your investment questions are more basic, the Australian Securities and Investments Commission (ASIC) can help you.

Its super vs mortgage tool helps Australians decide whether they’ll be better off putting extra funds into their superannuation or their home loan.

It asks users about their debts, savings and their retirement goals before providing a response.

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