Robos to the rescue
A new digital investment product is bridging the advice gap.
When US investment firm StateStreet introduced the first ETFs in 1993, they were touted as the simplest and most cost-effective way for the average investor to access the market.
Indeed growth has soared. In particular millennial investors are now gravitating toward ETFs faster than any other group. According to a study by Charles Schwab, 56% of millennial investors say ETFs are their investment of choice, compared to 44% of generation X investors, 30% of boomer investors and 23% of seniors.
But as their popularity has soared, so has the number of ETFs. While the global share universe numbers some 47 000 companies, there are 5 000 index funds in existence. The market doesn't need 5 000 index funds, argues Vanguard founder Jack Bogle.
The ETF market is unnecessarily complicated says Jack Bogle.
Nerina Visser is a strong advocate of ETF investing.
"The whole idea of indexing funds was simplify, simplify, simplify. Simplify is everything. And we've now complicated it by giving people many choices and building a system where they can trade those choices into growth and out of value, out of value and into growth, and so on. And so there's too much trading going on which is the investor's enemy,” he says.
Though the South African market is less mature, there are 94 exchange-traded products listed on the JSE with a collective R85 billion invested in them, says Nerina Visser, a director of portfolio management company etfSA.
“The ETF market lends itself to self-study and self-understanding. These are simple products to use and understand and ideal for people who do not have access to a financial advisor. However, the product range is now quite big – which is good for investors who can use ETFs to build portfolios of multiple asset classes and investment exposure.”
Buying a simple equity index tracker and putting it in the bottom drawer is not the worst idea, adds Gareth Stobie, MD of index tracking company, CoreShares. “But it is not diversified across asset classes and is probably not defined in the context of a particular goal or outcome. To understand their own needs, goals and desired outcomes is a lot of work to leave with a DIY investor.”
However, while a big proportion of SA’s population could benefit from financial advice, top financial advisors don’t want to spend a lot of time with clients who don’t have material wealth to invest. “This is creating an advice gap,” he says.
The market has tried to close this gap, evolving to create platforms – like Coreshares, etfSA, Satrix and Sygnia – that provide cheap access to ETFs. It then went a step further with some institutions offering an online calculator or simple advice via robo-advisors.
There is a big advice gap in South Africa says Gareth Stobie.
Despite these efforts the ETF universe was (and is) beginning to feel as impenetrable as the world of unit trusts for many people. “So while an individual might get advice on how much to save, and even have a solution in terms of what ETF to buy, that is where it ends,” says Visser. “They then have to process that investment themselves because until now there has been no integrated advice and implementation technology solution available.”
A new solution appears to be bridging that gap.
Outvest, which is part of the Outsurance group, emerged eight months ago with a specific objective: to help individuals create and manage their own investment plan online. This is a cradle to grave solution – from an individual understanding his or her investment goals, to buying a tailored index product, to advice on how to adapt that product selection a year or two down the line when circumstances change.
Grant Locke: A robo-advisor is your first port of call.
“The entire client experience is handled by one entity,” says Outvest MD Grant Locke. The robo-advisor is the first port of call – you cannot enter the business without going through the advice system. From there you receive the recommendation and proceed to the application – an entirely digital process. Only at this point, he says, will a human advisor review the purchase request to see if it matches the advice given.
The system is built around index tracking funds to ensure consistency. “When you are providing digital advice, you must understand what drives your advice. We don’t pride ourselves on choosing the best fund managers – we pride ourselves on helping clients invest in products that will deliver a predictable outcome.”
With this in mind the Outvest team studied the behaviour of investment markets over the last 115 years and worked closely with CoreShares and S&P Dow Jones Indices to design a portfolio of five funds.
These range from a conservative money market fund, to an aggressive high equity fund. Each fund is an index of indices. For instance, the top ten holdings in the aggressive fund include the Vanguard S&P 500 ETF, the CoreShares S&P Global Property ETF, the SPDR S&P World (Ex US) ETF. In addition, the fund holds stakes in BHP Billiton, Richemont, Sasol, Naspers, Anglo American and Standard Bank.
Despite multiple indices within each fund, costs have been kept to a minimum. The unit trusts themselves run at a total expense ratio of 33bps. And Outvest charges 73bps for admin and advice bringing the total cost to 106 bps or 1.06%. “For a full service model this is the lowest cost in the country,” says Locke.
OutVest’s robo-solution is driven by algorithms backed up with human intervention.
In the same way that ETFs democratised the fund management industry, we believe that robo-advisors will democractise the advice industry, adds Locke. “This does not mean that a robot will take your job – or that of your financial advisor. What the robo can do is provide solutions into the ‘gap’, giving financial advisors time to do what they do best – help investors stay the course. Robos offer the opportunity for a true hybrid model – one where everyone wins.”■