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robo advice

Blog | Robo-what?

Alison Dellow
Private Client Adviser
25 Feb 2021

The future of financial planning has felt a little uncertain over the last few years after the raft of significant (but very necessary) reforms, with many financial advisers leaving the industry. Some speculate the future is digital and potentially in the form of ‘robo advice’.

We are living in a time where you can become an investor with just a few taps or swipes on your phone – this is Robo-advice. Robo-advice or Robo investing services are automated investment platforms that invest on your behalf.  Low fees, low minimum investment amounts, and a systematic approach make Robo-advice a potential substitute for humans – but only when it comes to investing.

Robo-advice essentially takes a number of activities and interactions that a human might normally have face to face with an adviser and automates them. This can include administration tasks for investment management, risk assessment, and data collection.

Sure, this changes the traditional landscape of financial advice but it’s not for everyone and certainly doesn’t ‘replace’ your adviser.

One of the key benefits of Robo-advice is that costs are low as a computer processes the data rather than a human.  This allows those who are ready to invest to start small and provides access to financial advice that traditionally caters more towards high-net-worth individuals. Robo advice typically uses passive investments, particularly ETF’s to construct portfolios. Passive investing is a style of investing that tracks an index like the ASX200 or S&P 500. ETFs are used due to their simplicity, access to different markets, and low fees. Passive investing can provide significant diversification however it could also come at a cost.

One of our main concerns with many passive index investments is that the strategy is based on market capitalisation (size) and price movement, not by changes in the value and quality of the underlying business.

For example, if you buy an index fund that replicates the ASX 200 index you are buying a piece of the top 200 companies on the Australian sharemarket. The higher the share price rises of a company within this index, the more of that company you are ‘forced’ to buy. You are essentially buying yesterday’s winners and hoping they continue to grow. On the flip side, if a stock falls in value the index fund would reduce this position to maintain its level within the index’s weighting. Or sell it all together if it drops out of the index. Refer to Pierce Hanlen’s blog published earlier this month for further detail.

The alternative to Robo-advice and passive investing is the human financial adviser and active investment approach. Active investing involves developing a strategy where an investor or asset manager attempts to use their skill, research, and experience to outperform the market. At Hewison Private Wealth, we believe client objectives and outcomes should be the main priority and that investment decisions should be driven by client needs and tailored to individual circumstances and financial outcomes. There is no point in investing in the cheapest fund if it is not meeting your goals and objectives. We favour a direct investment approach and design a tailored asset allocation to assist our clients to meet their goals.  Our clients’ portfolios are adjusted or rebalanced as required to remain in line with their target asset allocation or to take advantage of market opportunities. A direct investment approach provides our clients with ultimate control over their investments, particularly around income reliability.

There is a lot more to a financial adviser than investment advice. The purpose of a financial adviser is to guide clients to achieve their long-term objectives using different tools. This is made up of investment recommendations, strategic recommendations such as whether to focus on home loan repayment, super contributions, borrow to invest and so on (the list goes on). An adviser is there to partner with their clients over the journey to financial freedom. A system or automated approach simply won’t replace the relationship and human interaction you have with an adviser.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.