Despite the hype, ‘robo-advisors’ will never have the personal touch vital to gauge individual risk preferences
Don’t expect these new digital tools to offer anything more than cheap, standardised options
Today’s investors – millennials, gen-X’ers and baby boomers around the world – face a widespread and fundamental crisis of investment faith that financial advisors and wealth managers refuse to bear witness to.
Baby boomers, a demographic that has provided this generation’s leadership, are entering retirement in a state of actuarial bankruptcy. 64 per cent of people over the age of 65 have only a year’s savings under their name. The younger millennials will be depleted twice by lower market returns since the financial crisis and higher future taxes needed to support the boomers.
The golden retirement mirage has faded. The enormous increase in longevity will leave everyone stranded with major medical bills. The stagnation of middle class incomes all over the world and under saving can only be catastrophic. Today, households need to earn and save enough money over a 35 year career span to support themselves for that period, but also to help fund maybe three more decades of retirement.
Unless your timing was perfect for equities, holding 40 per cent of your portfolio in equities and 60 per cent in fixed income products could prove disastrous. No financial advisor has the genius to fund a 20 year or longer retirement on the basis of the amounts that the vast majority of people are saving.
According to a recent survey by the Hong Kong Institute of Human Resource Management, Hong Kong’s workers can expect an average pay rise of 3.5 per cent next year. This is equal to the same increase as this year, which also happens to be the worst since 2010.
How Hong Kong people will be able to afford a flat with such bad affordability ratios and save for retirement is a mathematical impossibility. Investing in flats used to be a reliable store of value for retirement, but today no one can afford them. But, if Hong Kong residential real estate resumes its upward climb – a reasonable assumption – and forms a bubble, an entire generation will surely retire broke.
Then a new fad called financial technology and “robo-advisors” came along offering the true and only heaven. Robo-advice is a label for digitising asset management.
Robo-advisors have conflated asset management along with broad based wealth management to exploit improved customer retention metrics. However, account opening, performance reporting and digital access is only a small portion of managing a person’s wealth.
Robo-advisors and their algorithms only adjust for lifestyle and return profiles and market risk.
But, they cannot adjust for individual risk preferences. Go to several of their sites, fill out their profiles and questionnaires and you’ll find that the results are the same. And even worse, users don’t know what kind of risky, structured products that underly the choices being made. These issues are more important than the user friendliness and low cost.
Robo-advisors have so far proven to be successful for financial organisations as a way to achieve scale on marketing products. But so far they appear to be afflicted with manifest failures in helping individual investors navigate today’s treacherous investment scenarios.
There is also the inherent mathematical problem that no one wants to talk about: eight per cent returns on your portfolio are extinct. Warren Buffet has stated this at many Berkshire Hathaway annual meetings. US stock returns may now be between 4 to 6.5 per cent range. US bond yields, previously assumed at 5 per cent, are between 0.00 to 2.00 per cent.
The robo-advisers are using the exact same actuarial tables with similar expected market returns. This means that retirees will be told to allocate a large portion of their portfolio to very low yielding bonds. The remainder will hold low return equities. And today’s low rates virtually guarantee they cannot live on their pension incomes.
Even the best human advisors or conscientious do-it-yourself investors, have to understand that generating huge savings is the key part of their planning.
This is nearly impossible when a household is paying for college educations. Retirees would be wise to question the prevailing wealth management propaganda that fuels dreams of a resort style retirement, idyllic pursuits including regular travel, golf and fine dining.
Yet the robo-advisor will calmly and accurately drive them to that disastrous strategy and outcome. And they will do it for very low fees. Instead, like a stern fortune cookie, it should be admonishing its users to save more, work longer, and cut personal costs. But, no robo-advisor is programmed to tell you to avoid investing. In the interim, we can watch the robo-advisors economically and efficiently drive the pensioners around the world off the cliff to almost certain penury.