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Internationally, there has been a rapid increase in technological solutions which enable personalised investment advice to be given via the internet without the intervention of a financial adviser.
Robo-advice is the provision of financial planning services via a digital platform that provides automated, algorithm-driven financial planning services with little or no human supervision.
Typically, the platform will collect information from the clients about their financial situation, investment goals and attitude to risk and use the data to offer advice and invest client funds.
One of the drivers for facilitating such platforms to operate in the New Zealand environment is that the regulator, the Financial Markets Authority (FMA) perceives that there is an advice gap in the market where small investors are seeking guidance and advice but have insufficient funds to pay for a ''human'' financial adviser.
The time involved in servicing clients with relatively small funds to invest often outweighs the financial benefit for advisers.
The FMA reviewed KiwiSaver sales in 2015 which showed that most consumers do not obtain personalised advice on Kiwisaver.
This includes entry into a KiwiSaver scheme and transferring between schemes. Given KiwiSaver would be the most common non-property investment product for New Zealanders, the FMA perceives there is an advice gap here which could be addressed by personalised robo-advice services.
The Financial Advisers Act was passed on 2008 and did not contemplate robo-advice.
Under the Act, personalised advice to a retail client must be given by a natural person.
The Financial Advisers Act does permit an entity to provide class robo-advice.
Class robo-advice includes generic recommendations based on characteristics such as age and risk profiles.
However, the FMA is of the view that the line between personalised and class advice is not clear, which creates risk for the adviser.
Interestingly, the financial advisory industry is not necessarily opposed to the law being changed to facilitate robo-advice.
Internationally, many of the new products available have been promoted by financial advisory firms who are recognising the consumer demand for cheap personalised advice and have put in place platforms to facilitate this. Clients who traditionally use personal financial advisers in many instances still prefer to have the human contact and the changes may not be as threatening to the industry as might first be thought.
One example of a US robo-adviser which is filling this space is LiftOff, which has a minimum investment of $US5000 ($NZ6891).
The product was launched by Ritholtz Wealth Management.
It asks investors what their reasons are for investing, for example saving for a retirement income, a specific financial goal such as owning their own home or for income, asks about risk strategy and then provides a projection for what sort of return they might get on a particular investment amount.
An Australian provider, StockSpot, charges no advice fees for balances under $A50,000 ($NZ52,000) but charges a management fee of 0.066% of the funds balance per month (around 0.8% per annum).
For amounts $A50,000 and under $A500,000 you would pay an advice fee of $A55 and a management fee of 0.005% of your investment balance per month (0.66% per year).
The minimum investment amount for a StockSpot portfolio is $A2000.
Australian online investment publisher, etfWatch, predicts that by the end of 2017 there will be a dozen robo-adviser platforms operating in Australia.
In New Zealand, the FMA is now seeking submissions from market participants and consumers on its proposal to allow personalised robo-advice in New Zealand by way of an exemption to the Financial Advisers Act.
It recognises that robo-advice can pose greater risks in some areas than human advice as a mistake in an algorithm can result in more widespread losses due to the scalability of a digital platform.
However, it also hopes that it will direct more consumers to seek investment advice due to the lower entry costs and the ability to invest smaller amounts whereas those investors may not have sought advice or may not have undertaken an investment due to the entry barriers.
The final date for submissions on the proposal is July 19, 2017.
If the FMA decides to proceed with the exemption, it is likely to be implemented fairly quickly as there is already law reform in the pipeline for 2019 and the exemption proposal would enable personalised financial advice through a digital channel to be given prior to that date.
-Sally Peart is a partner in Marks & Worth Lawyers and IP Specialists and advises businesses on a wide range of commercial and intellectual property law issues.