Rainmaker Information, an Australian financial services information publishing house, has estimated that “robo advice” has a potential market size of $60 billion.
Robo advisers are digital financial planning and investment services that offer recommendations to retail investors, typically based on a questionnaire analysed by a computer algorithm to determine the investor’s risk profile.
The recommended investment options or solutions are often assembled using a suite of low-cost products such as exchange traded funds (ETFs), which is why they are so cost effective.
Rainmaker Information has identified eight robo advice providers in Australia.
While only Stockspot and InvestSmart publicly report on their funds under advice, Rainmaker Information speculates that this market may be collectively advising on several billion dollars.
While the market for robo advice is still in its infancy in Australia, robo advisers in the US (the world’s largest market for robo advice) currently oversee $825 billion in funds under advice, with 14 million clients through 21 robo advice providers.
Adjusting the US figures for the Australian population, Rainmaker Information reported a $60 billion potential – twice the amount estimated in 2018.
“Robo advice is becoming an increasingly attractive proposition in Australia, as it is a very cost-effective way for retail investors to obtain limited financial advice and be connected with packaged investment solutions,” Rainmaker Information executive director of research and compliance Alex Dunnin said.
“The financial adviser sector shake-out that has happened over the past few years, where the number of advisers has dropped from 28,000 two-and-a-half years ago to 19,000 now, means that digitally delivered robo advice could rapidly become incredibly important for millions of Australian consumers.”
Australian robo advisers offer seven investment solutions on average. Stockspot was found to offer the most, with 13 investment solutions.
Seventy per cent of the available options are diversified, meaning investments are mixed with exposure to shares, property or bonds.
The attractiveness of robo advice lies in average charged fees of just 0.3 per cent per annum, based on a $10,000 placement. When combined with the embedded investment fees of the underlying ETFs, total fees are likely to be around 0.4 to 0.5 per cent per annum.
This is about half the total fees charged by the average super fund in Australia.
These fees are slightly more than the fees charged by US robo advisers, though this difference can partially be attributed to the scale benefits associated with a much larger market.
The ETF brands used most often by Australia’s robo advisers include iShares, Vanguard and BetaShares.