Is digital advice going to be the great equaliser for regular Kiwis’ wealth building? Are swanky financial advisers going to have to sell their second car? We compare the pros and cons of digital vs human financial advice.
We already remember the parody of a rich New Yorker stalking down Wall Street in an Armani suit yelling “BUY LOW” or “SELL HIGH” to his stockbroker down his Bluetooth headset. It’s 2020 now and …. these guys still exist (unfortunately).
But while 50 years ago the rich guys in expensive suits were the only ones getting access to sage financial wisdom, things are quite different today. These days, people across the world can go to digital advisors, which are generally free or very low cost and don’t require a bank account overflowing with cash to join.
That doesn’t mean we’re living in some dystopian sci-fi future — there are still plenty of financial advisors kicking about, but there’s also a new class of people who never would’ve been able to invest, who have benefited greatly from the guidance they can get through some clever computing.
Why advice in the first place?
Your average New Zealander is lucky enough to not be spending their mornings and nights following international markets, tracking fluctuations in precious metals prices, and distinguishing between the performance of certain stocks. The role of advice, both human and digital, is to do that boring leg work for you.
For example, your digital advice tool for your KiwiSaver plan understands that you’re 30 looking to put some money away for retirement, which is a vastly different position for a 20-year-old eyeing up your first home. These things have huge impacts on the way that your investment portfolio is sliced up.
Value of a digital advisor
We all like to think we're each a beautifully unique person, with our own exceptional needs, but one of the hardest lessons we all learn as we get older is how similar we all really are.
If you’re looking for some assistance for your retirement savings as a 40-year-old making $70,000 a year, you’re more than likely going to be in a similar bracket to someone else in that same age and investment horizon. This is part of the equation that has made digital advice so successful.
Digital advice is still quite new in New Zealand financial services, despite mainstream adoption in other parts of the world, but has been proven to be a low-cost way to help people take better control of their finances. In many cases, like here at kōura, it’s often paired with a real person to give some of the parts you might be missing from personal advice, without the major costs associated.
1. Cost. Digital-advisors can range for a 0% fee up to around 1% of your investment for what is, usually, reasonably identical advice to the stuff a human is giving. When you’re saving a couple of percentage points over a lifetime of investing, the savings can be incredible.
Digital advisors are passive, which we discuss in this blog.
2. Access. Most financial advisors need thousands of dollars in investment for it to be worth their while. Digital advisors couldn’t care less how much you’re packing. If you have $100 or $10,000, a digital advisor will cater its guidance exactly to the parameters you can provide it.
3. Taking the ego out of it. Like it or not, people have egos. Robots don’t. You won’t find robots trying to short the market with fancy tricks, but you can count on it to do exactly what you expect it to do. It’ll take money automatically out of your account, transition your investment portfolio as you get closer to a goal, and with none of the fancy bells and whistles you get with a more expensive advisor
1. No personal relationship. This is not a robot romcom “Her” is a great film exploring the romance between a man and his Robo-advisor. Reality is a little more boring. Your digital advisor doesn’t do small talk or Friday drinks, but it does help you with your finances.
A shortfall of not having a relationship with your digital advisor is that, unlike a financial advisor, it’s not going to be there to take a 3 am phone call when you see the market dipping. You’ll just have to trust in its advice.
2. No insight into your life. A benefit of a financial advisor is they can take into account the broader understanding of your finances. A robot doesn’t know why you’ve dropped half your monthly income on a big weekend, it just knows that wasn’t a good thing to do. A financial advisor can help you improve your spending habits to stop that behaviour.
Personal Digital Advisor
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Value of a human advisor
A human financial advisor will know your dog’s name, is more than happy to meet up for a cup of coffee, and will be able to personalise your investments exactly to your specific whims or preferences. Financial advisors are as old as money itself, but they’ll usually cost you a pretty penny, too.
1. They know you. You're more than a series of numbers and data points to your human financial advisor. They’ll be able to advise you across the full range of assets, including real estate, and your investment portfolios. They’ll also be able to restructure according to your attitude — if you’re starting to stress about the impact of the coronavirus on a certain portion of the market, they’ll be able to move assets around for you.
The advice is going to be far more personalised and capture many different data points from inside and outside of your investments.
2. The know you (part two). From experience, the most important role of a financial advisor is therapy. They don’t just know your finances, they know when you’re starting to freak out and how to talk you down off the ledge from liquidating your retirement savings and buying a new cryptocurrency.
1. Cost (part 1). The cost of a financial advisor will outweigh a digital advisor by huge amounts. They’ll take between 1% and 2% of your portfolio, which might be the equivalent of a couple of years worth of savings in your retirement.
2. Cost (part 2). The barrier of entry is incredibly high for the many New Zealanders that don’t have the minimum $50,000 or so in the bank to even get an initial meeting with a financial advisor. With $500 to invest, you’re simply not worth the time for a human financial advisor.
3. Error. One of the most compelling arguments for passive investment is the low margins for error. Active investment has some potentially high reward if done very well (luckily), but is also incredibly prone to do poorly. If your financial advisor convinces you to take on some risky investments, you (not them) will be the one paying the price.
All in all, humans and robots will always have their roles in society, but digital advice is going to be the new frontier for investments here in New Zealand. Regular people have, for too long, been locked out of investment guidance because they didn’t have the money required to get that education. kōura digital advice solution, combined with our helpful team, marry to give customers high-quality insights into their investment horizons to help give a better, more fruitful retirement.
Try out our KiwiSaver Digital advisor to see how your retirement could look like!