It may be a hot topic for investors, but what does the term “robo advice” actually mean? Here is some much-needed clarity from Netwealth COO and co-founder Thomas Salter.
If you regularly read the Personal Finance or Money sections of any newspaper, it’s unlikely that you’ve escaped reading about robo advice. You’ll probably have heard how it is transforming investing and typically the article will be accompanied by the obligatory picture of a robot sitting at a table with a client or a cyborg hand hovering over a keyboard.
You may well be completely unclear about what robo advice actually means. Does it mean a computer algorithm manages your investment portfolios? Or that a computer replaces the role of a financial adviser? Does having a great website turn a wealth manager into a robo adviser?
Let’s try to clear a few things up. The term “robo adviser” originated in the US, where it refers primarily to automated investment management. Here in the UK, where “advice” tends to mean planning and recommendations for your financial circumstances and goals, “robo advice” mainly refers to automated recommendations for a suitable risk-return profile for your investments. When the FCA mentions robo advice, this is what it generally means. In fact, many of the UK companies that are commonly referred to as robo advisers manage client portfolios with human-led asset allocation, among them Nutmeg, Netwealth and Wealthify. At Netwealth, we believe this is the best way to manage investments (even while applying the latest technology to ensure a powerful client interface, operational efficiency and low charges).
Robo advice can be very useful and cost effective for simple financial needs: it can look at a specific goal or slice of your life and help come up with a sensible risk-return profile for an investment. For broader or more complex advice, however, we believe humans are still much needed – unlike machines, they can take an intelligent look across your full circumstances and needs.
But back to the definition of robo advice. I’m reminded of the wisdom of Dr Thrishantha Nanayakkara, a roboticist at Imperial College London. When he was asked recently to define a robot, he responded: “A robot is a robot if you think it is a robot.”
So let’s ignore the fact that many commentators conflate financial advice, investment management and general use of technology when talking about the world of robots and computers: the term “robo advice” is here, and let’s embrace it. Just remember that it may refer (sometimes simultaneously) to: a firm providing online financial advice and automated investment management; a firm providing online financial advice and human-led investment management; and a firm providing human-led investment management without online advice (but with a cool website).