Aussie robo-advisors need hundreds of millions in AUM to break even. How can they get it? By targetting SMSFs, says Six Park CEO Patrick Garrett.
Most Aussies don't know what ETFs are. And the vast majority of Aussies have absolutely no idea what robo-advice is.
So if you're starting a robo-advisor, how do you gather assets from a public that doesn't know you exist? One way is to target self-managed superannuation funds - or so says Patrick Garrett, the CEO of Six Park, one of Australia's new robo-advisors.
"When we first launched, more than half of our clients were SMSF trustees‚Ä¶ We attracted small investors, but just as many sophisticated and larger dollar-sized investors who gravitated towards our service."
Robo-advice is newer to Australia than other English-speaking countries like the US and the UK. And thus far there are only four players: Stockspot, Clover, Quietgrowth and Six Park. (Acorns, though sometimes called a robo-advisor, has distanced itself from the label.) All four of these companies have been launched since 2013.
But while robo-advice is newer in Australia, the superannuation system, which requires Australians by law to save for their retirement, means there is more to play for. For robo-advisors the particular interest is self-managed super funds, or SMSFs, which allow Aussies to manage their own retirement pots. SMSFs are popular with rich Australians, though the average size of SMSFs is decreasing given the lower costs involved.
"At present, there are more than A$600bn of assets in SMSFs, and many of those investors are poorly diversified and not receiving professional investment advice," Mr Garrett says.
"These trustees would benefit greatly from a service that provides investment diversification at a low cost ."
The idea that robo-advice would appeal to SMSF trustees has been - and still is - greeted with scepticism by some. Critics have asked: why would rich Australians, who have chosen to take control of their retirement money, surrender that control? Why would people who can afford to pay four-star active investment managers want to deal with a computer programme that never try to beat their benchmarks? And how do investors know they can trust robo-advisors with their money?
Here, Mr Garrett says, the answer is two-fold. As for why rich people will bother, he says many trustees are now seeing that active managers frequently underperform versus their benchmark indexes. "We believe that too many trustees have a hard time investing themselves, or overpay for underperformance, and now opt for a core/satellite approach in dealing with their investments."
"This involves allocating a portion, or all, of their assets - the core - to a safe platform that provides a diversified portfolio of professionally managed investments, at a low cost. This then lets them do other things - the satellite - such as invest directly in properties, or pick stocks."
As for building trust, many Aussies trialling robo-advice dip their toe in the water first, Mr Garett says, and put in an initial amount of money to see how the system works. They then add more later when they're convinced that their money is in safe robotic hands.
"At least 90 percent of our customers have invested and then added more money‚Ä¶ they can put in a small chunk then realise this is easy to use, effective, and transparent with regard to performance and fees."
While SMSF trustees may trust robo-advice after trying it, they have to know about it first. In order to reach out, Six Park has mostly been going B2C. The company sponsors conferences and industry organisations to try and connect directly with SMSF trustees.
"We've been direct to consumer so far. We've not gone through the adviser or accountant route, although we're working on that now. The majority of SMSFs with under one million dollars are not advised. There is no gatekeeper besides accountants, and we are now being approached by accounting forms to help make this type of service available to their customers, since we are licensed to provide personal advice," Mr Garrett says.
But the battle doesn't end there. Six Park's low fees (30-50 basis points a year) are great for its clients, but ultimately mean the company needs to scale heavily to hit positive cash flow. "I doubt there is a cash flow-positive robo-advisor in the world at this moment," Mr Garrett says, "but the clever models are smart at managing costs and building distribution networks to get scale quickly. At 30-50bps fees, robo-advisors probably need hundreds of millions in AUM to break even."
And many have wondered out loud how many robo-advisors the Australian market can fit, as well as how long it will take until big companies like ETF issuers roll out competitors.
"Incumbents won't sit still for long once they see a competitive threat. For business models that are well managed and clever, given the market need and problems in the wealth management size, there should be room more than one provider. But I doubt you'll see 10 in a few years - you'll see what you can count on one hand."
But with robo-advice still a new feature of Australia's investing landscape, how it will develop is anyone's guess.
**About Six Park**
Like other robo-advisors, the company offers five portfolios for investors depending on their risk appetite. It uses ETFs from seven different asset classes: Australian shares, international shares, emerging markets shares, global infrastructure, global property, bonds and cash. Six Park is independent and does not take commissions from any ETF issuer.
This article first appeared on www.roboadvicenews.com
Six Park is based out of Melbourne and headed up by Patrick Garrett. It is advised by its finance committee, which features Brian Watson, a former chairman of JPMorgan Australia, Paul Costello, a former general manager of the Australian Government's Future Fund, Lindsay Tanner, the Australian Minister for Finance from 2007 - 2010. While it uses computers to create ready-made portfolios for investors, Six Park claims to offer more human overlay than other robo-advisors, with its investment committee making recommendations about asset allocation and the chosen ETFs for clients' investments.