EXPLAINER | What is a robo-advisor?

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  • Robo-advisors help you identify an appropriate asset allocation for your goals and your risk profile.
  • Robo-advisors are often used to advise on low-cost passively-managed funds.
  • Your investment will most probably include a platform fee, advice fee, and underlying fund fees.
  • For more financial news, go to the News24 Business front page.

A robo-advisor may sound like an advisor with superhuman artificial intelligence, but in truth, their services may be quite limited.

They offer you self-service access to simplified versions of the software that human advisors use to determine suitable investments for you.

In South Africa and many other countries, robo-advisors currently focus on your investment needs only – they typically do not offer advice on life or disability cover, healthcare cover, or estate planning.

In South Africa, robo-advisors are currently focussed on investments in a selection of unit trust funds or exchange-traded funds and may suggest you invest through a product to save on tax.

Who is it best suited to?

Robo-advisors serve you best when you have separate defined investment needs or goals that can be met with the right selection of unit trust or exchange-traded funds.

You should not expect financial advice that takes into account all your circumstances and identifies risks to your financial life, such as too little life and disability insurance, your overall asset allocation if you own assets such as property, your retirement planning, or your estate after death. You may be offered an investment in a tax-free savings account or retirement fund to save tax or maximise your tax deductions, but don’t expect much tax advice beyond this.

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Robo-advice is aimed at the tech-savvy, do-it-yourself investor and you can access the advice at any time without an appointment.

How does it work?

Through a website or app, a robo-advisor will ask you to answer a series of questions designed to determine your investment goals and your capacity and tolerance for investment risk.

It will then determine the appropriate asset allocation for you – how much you should be exposed to riskier asset classes, such as equities and listed property, and how much you should allocate to less risky investments, such as bonds and cash.

If you are new to investing, this can be valuable and should lead to a better outcome than a random selection of investments.

The investments robo-advisors offer are typically low-cost ones – in many cases ones that are passively managed - and the advice fee charged for the automated service is also typically lower than that a human advisor would charge.

You may be offered investments across different asset classes giving you diversification and lowering your risk, but you should be aware that passive investments track the market and will go down when the markets do.

Online investment

Robo-advisors then typically offer you an automated investment process to enable you to open the appropriate investment account.

Thereafter you should have online access to your investments so you can monitor their performance.

Beyond guiding you to select appropriate investments for your needs, a robo-advisor should monitor your chosen investments and alert you if you need to rebalance your assets back to an appropriate asset allocation after movements in the markets. 

Robo-advisors may offer contact with a human if you ask for assistance the computer algorithm is unable to solve.

Investment selection

A good robo-advisor will select appropriate investments from the range of funds available in its country and then determine which ones are best suited to your needs.

The robo-advisor should also select an investment platform on which the investments are listed.

You should be aware that several investment product providers offer robo-advice that helps you identify your goal investment amount, your time horizon, and your risk profile.

You are then channeled into a selection of that provider's investment products or a mix of them, but you are not getting the benefit of investments being identified from a choice of product providers.

The key to a good robo-advisor

As an impatient online investor, you may wish for as few questions as possible, but the key to a good robo-advisor is the balance between simplicity and getting an accurate view of your investment goals and risk profile.

Your risk profile is made up of the return you need to earn to reach your goal, the investment risk you can afford to take, and your ability to tolerate the required level of investment risk.

Good robo-advisors also put some effort into their questions to ensure they elicit the right answers about your attitude to investment risk. South Africa has very few robo-advisors, but some financial advisors and financial services groups offer them.


If you are using a South African robo-advisor it should help you identify the right product for your investments, depending on whether you need a retirement annuity, a tax-free savings account, or a discretionary investment.

The limitations of robo-advice

A human advisor can help you identify and prioritise your investment goals, while robo-advisors can only advise on the goals you set. A human financial planner can act as a coach, encouraging you to take the steps necessary to meet your goals - such as cutting back on lifestyle expenses or selling an expensive car - to save more.

A full financial plan from a human advisor should also ensure that you have the necessary financial protection – such as an emergency fund, life cover, insurance, and medical scheme cover - in place. This will ensure your goals are not derailed if any crises occur.

Robo-advisors are also unable to identify risks and problems that you should be dealing with – such as debt or risks to your continued employment.

They also cannot analyse your current investments and ensure their suggestions complement any investments you already have.

A human advisor will also consider future needs for you – and your spouse if you have one - that may impact your investment decisions. Robo-advisors may send you interesting articles, videos, or podcasts, but there is no human counselling when markets are bad and you are panicking about your investment.

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Advisors can build a relationship with you and understand your situation – no matter how complex - with empathy. They can hear you, understand you, and encourage you. An advisor can assess the role money has played in your past, your background, culture, and current situation. They can use all these insights to help you plan for the future and guide you on the right path.


Robo-advice may be provided by an algorithm, but the provider will still charge you an advice fee and you will pay a platform fee and investment fee on your chosen funds.

The automated investment process may make your advice fee lower than that you would pay a human advisor especially if you are just starting your investments.

Big robo-advisors can benefit from economies of scale and offer good investment fees but smaller ones tend to keep costs low with passively managed funds.

The fees are typically calculated as a percentage of the amount you have invested through the robo-advisor.

Robo-advice is regulated

The financial services regulator, the Financial Services Conduct Authority, has defined robo-advice as "the furnishing of advice through an electronic medium that uses algorithms and technology without the direct involvement of a natural person".

It has also published fit and proper requirements for robo-advisors stating that the person or entity must be licensed in terms of the Financial Advice and Intermediary Services Act and must:

  • Understand the technology and algorithms that provide the advice;

  • Understanding the methodology, including assumptions, of the algorithms;

  • Understand the preferences or biases of the methodology;

  • Understand the risks and the rules underpinning the algorithms;

  • Identify the risks for those using the advice; and

  • Monitor and review the quality and suitability of the advice.

This article was first published on SmartAboutMoney.co.zaan initiative by the Association for Savings and Investment South Africa (ASISA).

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