Robo advisers are digital financial planning and investment services that offer recommendations to retail investors, typically based on a questionnaire analysed by a computer algorithm to determine the investor's risk profile.
The recommended investment options or solutions are often assembled using a suite of low-cost products such as exchange traded funds (ETFs), which is why they are so cost effective.
Rainmaker has identified eight robo advice providers in Australia.
While only Stockspot and InvestSmart publicly report on their funds under advice, Rainmaker speculates that this market may be collectively advising on several billion dollars.
But showing the potential, robo advisers in the US, the world's largest market for robo advice, currently oversee $AU825 billion in funds under advice, with 14 million clients through 21 robo advice providers.
Adjusting the US figures for the Australian population, Rainmaker sees a $60 billion potential, twice the amount they estimated in 2018 when they last reviewed the market sector.
"Robo advice is becoming an increasingly attractive proposition in Australia as it is a very cost-effective way for retail investors to obtain limited financial advice and be connected with packaged investment solutions," said Alex Dunnin, executive director of research and compliance at Rainmaker Information.
"The financial adviser sector shake-out that has happened over the past few years, where the number of advisers has dropped from 28,000 two-and-a-half years ago to 19,000 now, means that digitally delivered robo advice could rapidly become incredibly important for millions of Australian consumers."
Australian robo advisers offer an average seven investment solutions. Stockspot was found to offer the most with 13 investment solutions.
Seventy per cent of the available options are diversified meaning they mix their investments across exposure to shares, property or bonds.
What makes robo advice so attractive is that they charge average fees of just 0.3% p.a., based on a $10,000 placement. When combined with the embedded investment fees of the underlying ETFs, total fees are likely to be around 0.4% to 0.5% p.a.
To illustrate how competitive this pricing is, it is about half the total fees charged by the average super fund in Australia.
These fees are slightly more than the fees charged by US robo advisers, though this difference can partially be attributed to the scale benefits associated with their much larger market.
The ETF brands used most often by Australia's robo advisers are iShares, Vanguard and BetaShares.
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Total risk market inflows were down a marginal 0.6% over the year to June 2024, decreasing from $18.3 billion to $18.2 billion.
Dual access ETPs, which are transacted both on stock exchanges and off-market through funds managers, can cost four times as much as the rest of the Australian ETP market.
