Digital advice may seem impersonal, but it's not. It can play a big role in helping us invest in our retirement.
For most people, buying a home, followed by saving for retirement are the two most important financial decisions they will take. As a recent paper by Invesco put it, “saving enough – or not – can mean the difference between pursuing dreams years in the making or them staying just that, dreams.
Most of us do a great job saving but stumble when it comes to investing. That’s because, there’s a lot to consider when investing, especially when it comes to your KiwiSaver fund. Asset classes, investment horizon, risk appetite are just a few of the things that need thinking about. It’s no wonder then that most of us would rather shut the computer and go binge on Netflix.
Research by kōura and many others in the industry shows that people need help to make better decisions with their KiwiSaver investment, and the cost of not making the right decisions can be the difference between a comfortable and not so comfortable retirement.
The key to making the right decisions is asking for help. But who do we go and ask for help? Our parents did not do KiwiSaver. So, they are great when we have a question about buying a house or shares, but KiwiSaver is a bit of foreign concept. Next on the list is Aunty Google, where you can find out just about anything, just that it comes with at least six other contradicting facts. And finally, there are financial advisers, a great option if you can find one that is willing to talk to you.
So where does digital advice fit into this? Digital advice combines the best bits of a financial adviser and Google. You get great advice from the comfort of your couch. Its no wonder then that several recent industry reports think that artificial intelligence and digital advice could be the significant breakthrough that finally improves every day Kiwis’ financial literacy and engagement.
We may appear a bit biased, but we tend to agree. We truly believe that digital advice has the ability to transform how people save and invest. Set out below are the reasons why we think a smart digital adviser is a great way to manage your finances:
A digital adviser can help you build a personalised investment portfolio by understanding your unique objectives and risk tolerances. Having a portfolio that matches your individual objectives will have the greatest impact on your KiwiSaver balance (more than fees and performance ever will!). Importantly, your risk tolerance and objectives will change over time, so you need to make sure your digital adviser keeps on coming back to check on you.
In building your portfolio, a digital adviser should be asking you smart questions to help you assess your risk tolerance. The blunt question of “what is your risk appetite” is often not helpful unless you understand what risk is. A smart digital adviser will instead ask a selection of targeted questions in multiple ways which better helps discover your risk tolerance.
At kōura, we have over 200 portfolio variants that we use to construct personalised portfolios for our clients. This means we have a variation to match everyone’s goals.
Aside from providing a great customer experience, using tech enables companies to keep costs down and pass those benefits onto customers through lower management fees.
Many financial advisers also talk about offering a “free service”. However, the reality is that the underlying fund providers are often paying the advisers and so the advice you receive may not always be the one that’s just right for you. Additionally, the fund you invest in will be paying hefty commissions to these advisers, which results in significantly higher fund management fees.
By our estimates, the average fee for an advised KiwiSaver Growth fund is 1.4% per annum. This is significantly higher than the average market cost of 1.2% and more than double the cost of the kōura funds.
Consistency and transparency
While there is a wealth of information about investing online, not having personal guidance may mean that we fall into biases, we may not even know we have. For example, you shy away from index investing because your parents only ever put their money in a term deposit. Or, if you’re someone that loves new technology, you may be drawn to cryptocurrency when that may not necessarily be the best option for a specific investment goal.
When using a digital adviser, your investment recommendations are based on financial techniques and theory-free from the behavioural bias of an adviser, resulting in objective recommendations for the client. Here, the answers are always consistent and can even be audited. This not only helps you become more engaged with your KiwiSaver but also helps you be hundreds and thousands better off in retirement.
Available to everyone, always.
Financial advisers typically only want to work with people that have a big enough balance to justify the commissions on the accounts. As a result, not everyone has access to the financial advice they need.
Sometimes there may be financial advisers that help you choose a KiwiSaver plan and then disappear if you don’t have any further funds to invest or no longer require their expertise. However, your KiwiSaver is not something that you can set and forget. It needs constant nurturing, and you need to make sure your adviser sits down with you regularly.
A true digital adviser will remind you to review your account regularly to make sure that your portfolio remains in line with your objectives. You will continue to change, and you need to make sure that your portfolio reflects this change. At kōura, we remind you to check what’s changed with your portfolio and provide automatic re-balancing services.
Whether we like it or not, computers and artificial intelligence are now already prevalent in many facets of our daily lives and are replacing many of the things we used to do face to face. The term digital advice may feel a bit impersonal. But, when implemented correctly, it has the potential to drive innovation and help us make meaningful investment choices that are in our best interest.