When the Dubai resident Lewis Brown and his wife Penelope wanted financial planning advice, they took what for many is a natural step – they spoke to a financial adviser.
The adviser, Will Carling of AES International, spent several hours sitting down with the family to discuss their finances.
There is nothing so remarkable about that but it may seem strange in the future, because flesh-and-blood financial advisers such as Mr Carling are increasingly being replaced by robots.
The march of the robots is sweeping through the workplace and now it has hit the financial services industry, with the rise of so-called robo-advice.
Robo-advisers deliver online wealth and portfolio management advice using computer algorithms and “smart software” rather than through highly paid financial planners. They often use the same software as real advisers but dispense with the human touch.
They can recommend a portfolio of investments to match your personal goals, timescale and attitude to risk, and rebalance them regularly as markets and the investor’s personal circumstances change. Unsurprisingly, ’bots are cheaper than their biped rivals. But can they really give you all the help and advice you need?
Mr Lewis, 46, who moved to Dubai from Britain in 2003 and works for an engineering company, is sceptical.
“I am rather old-fashioned and like to know the person I am dealing with, especially when it comes to an area as important as financial planning,” he says.
The engineer and his wife, 47, who works as a yoga teacher in Dubai and is also from the UK, needed complex pensions advice. They also wanted to discuss where they should invest money for their 12-year-old daughter’s university fees.
“Will and the team took time to understand our position and long-term savings goals before putting together portfolios,” says Mr Lewis. “It was a detailed and personal process, and there is no way we would trust a computer algorithm instead of a real person.”
Increasingly though, more and more people are choosing this route as robots transform the financial advice industry.
Automated investment services are gaining ground in the US, where major investment houses Vanguard and Fidelity are engaged in their very own robot wars through their tie-ups with the robo-advice sites Betterment and WealthFront respectively.
Robo-advice recently landed in the UK through DIY platforms such as Money on Toast, Simply EQ and Wealth Horizon. The robots haven’t invaded the UAE yet, but they will.
If you like the concept, you simply have to find your platform, answer questions about your income, savings, tax position, attitude to risk and personal goals, and the robo-adviser will design a “personal” portfolio for you.
This will typically be made up of a diversified mix of low-cost passive vehicles such as exchange traded funds (ETFs) that track global indexes, such as the S&P 500 in the US or the UK’s FTSE 100, and a mix of funds investing in specialist asset classes such as bonds, property or emerging markets.
You transfer the money you want to invest by debit card or electronic bank transfer and your portfolio is up and running within minutes.
For security, an independent custodian service typically holds your money, rather than the advisory company.
Sam Instone, chief executive of AES International, says ongoing portfolio management is done using computer-controlled rules, again, without the cost and bother of paying an adviser.
So as market conditions change, so will your portfolio, within the risk parameters you agreed at the outset.
The big benefit is that you cut out the middleman, Mr Instone says. “It is a quick and easy way of investing because you don’t have the expense of paying a human adviser.” He says robo-advisers typically waive all set-up fees, and charge a low annual management fee of between 0.3 per cent and 0.5 per cent a year, although, be warned, some platforms charge up to 1.5 per cent, pricey for an automated service.
“The cost of traditional financial advice in the UAE varies hugely, but you will struggle to find anybody charging less than 1.5 per cent a year in total costs, and most will charge 2 per cent or more,” he adds.
Many UAE residents are likely to find this low-cost option appealing, he says. “It could be a fantastic solution, particularly for those who have less than $50,000 and desperately need an affordable and efficient way of saving.”
Others would rather trust their money to a robot than the many sharks that prowl expat waters looking for easy victims to dupe.
Mr Instone says bad financial advice is the scourge of the UAE. “Too many advisers sell expensive and unsuitable products to unwitting expats. Robo-advice could help but it will take time to become established over here, and there may be regulatory hurdles.”
While robo-advisory platforms already available in the West are not open to UAE residents, some advisory companies have already recruited robo-advisers as backup to their human advisers, including wealth manager UBS.
Ali Janoudi, group head, Middle East and North Africa, at UBS, says using robots to prepare portfolios liberates advisers so they can spend more time planning their clients’ complex cross-border finances. “Technology allows us to deliver our proposals to the mobile phones, iPads and other digital devices. This needs to be regularly fine-tuned and must reflect the client’s investment profile. It also meets all the regulatory requirements expected of standard financial advice,” he says.
The UBS Advice platform is now available in the UAE and systematically monitors 650,000 clients’ portfolios every week, adjusting them in line with their risk profiles and long-term goals. “It also generates alerts, digital advice and investment proposals,” Mr Janoudi says.
UBS also gives the investor online access to their own portfolio, which they can review regularly to check performance.
The aim isn’t to offer a low-cost investment service, but to provide an extra service on top of traditional wealth management advice.
“What we offer is different to the rudimentary, computer-algorithm based advice offered by robo-advisers, which typically work in a single market rather than across borders,” says Mr Janoudi.
“The vast majority of our clients still wish to speak to an adviser and maintain the human interaction.”
Andrew Prince, a financial planner at the advisers Acuma, says investing via a robo-advice platform is as easy as operating an online bank account. “You can check your balance whenever you wish, withdraw money in a moment, or switch your money into other funds.”
But he warns that instant access to your money can be a double-edged sword, especially for inexperienced investors. “Some may panic and withdraw their funds when stock markets tumble, thereby crystallising their losses. Another danger is that you will raid your long-term savings to fulfil a short-term desire, such as buying a new car, depleting your retirement pot.”
This flexibility makes the platform very different to the offshore investment bonds often sold to expats, which demand you lock up their money for a set term of five or 10 years.
Mr Prince says the biggest downside to using a purely robotic platform is the lack of strategic financial planning. “A computer algorithm cannot help you work out your tax position, decide how much life insurance you need, or discuss your pension options.”
Tom Anderson, an investment adviser at the financial advisory company Killik & Co in Dubai, also questions the wisdom of using a purely online service, which he derides as a “box-ticking exercise”. “You wouldn’t go online and get a medical diagnosis from Google if you were sick, and most people would also prefer a conversation with a professional before deciding where to invest their hard-earned cash.”
Mr Anderson says a good adviser can tailor a portfolio to your specific interests. “Some people want to invest in individual stocks and shares. Or they may have an interest in a particular region or sector. The conversation is important, this is a two-way process.”
Many robo-advice sites only give you access to trackers and ETFs, rather than actively managed funds. “Passive funds are fine for heavily researched stock markets such as the S&P 500 or FTSE 100, where it is difficult for a manager to add value. They don’t work so well in other areas, such as equity income, emerging markets, smaller companies and specialist sectors.
This is where a good mutual manager can help you secure market-beating returns,” says Mr Anderson, who is also concerned that investors will be shoehorned into a portfolio based on whether they define themselves as low, medium or high risk. “People have very different definitions of what low risk is,” he adds.
For example, government bonds have been seen as low risk but some advisers fear they are now expensive and prices could fall if global interest rates start rising. “If this happens, a supposedly low-risk portfolio could suffer losses. Who do you shout at then – your robot?”
Despite the doubters, there is little question that robo-advice is coming to the UAE and will bring benefits alongside the dangers.
Expats with smaller portfolios, for whom financial advice is too expensive, would certainly benefit from hiring a robot, if the alternative was to have no advice at all.
If reputable and regulated robo-advice sites establish themselves in the UAE it could help win the war against advisory sharks. Already some UAE expats are getting robo-advice as part of their wealth management package, without sacrificing the human touch.
The rise of the machines will change financial advice as we know it but the robots are unlikely to terminate financial advisers for good. Artificial and human intelligence should find a way of working together.
The robo-advisor options
Betterment
What it does: Aims to "democratise financial advice" and help people build a balanced portfolio to meet their goals. Works in partnership with the global fund manager Fidelity.
Cost: Annual fee ranging from 0.15 to 0.35 per cent, depending on your balance.
Minimum sum you can invest: No minimum, but those with less than US$10,000 pay a $3 monthly fee
Access: Open to US residents only. Customers must have a permanent US address, a US social security number, and a US chequing account.
Wealthfront
What it does: Builds and manages a globally-diversified portfolio. Primarily recommends funds from low-cost tracker specialists Vanguard.
Cost: First $10,000 managed for free, thereafter a 0.25 per cent advisory fee.
Minimum: $500.
Access: All clients must have a US social security number and a permanent US mailing address.
Charles Schwab Intelligent Portfolios
What it does: Online investment advisory service with automated portfolio management that builds, monitors and rebalances your portfolio.
Cost: There are no advisory fees but you do pay fund charges on the ETFs it recommends, which can range from 0.04 to 0.48 per cent.
Minimum sum: $5,000.
Access: US residents only.
Moneyontoast.com.
What it does: The site uses intelligent algorithms to direct customers into portfolios of active and passive funds constructed by it team of investment analysts.
Cost: Platform fee of 1 per cent (minimum £3 a month) plus typical underlying fund charges of 0.69 per cent.
Minimum sum: £1,000 (Dh5,543) lump sum or £100 per month.
Access: UK residents with a UK bank account.
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