Great business idea

You have to give credit to the founders of South Africa’s first online investment advice portal, InvestOnline.co.za. Rod Lowe and Nick Brummer spent almost two years automating the advice process for clients who are interested in making a unit trust investment. It’s a great business idea that could provide them with a nice passive income. At the same time they could potentially provide a much needed low-cost service to online investors who have already decided to invest in unit trusts, but just need help deciding between hundreds of portfolios (a.k.a. funds) out there.

Low cost advice

Commission-remunerated financial planners usually charge between 1% and 5% up-front and between 0.5% and 1% per annum for advice. InvestOnline.co.za guides investors through the decision-making process at zero up-front costs – charging only an annual fee of 0.57%.

Simple site lay-out

I played around on the website and found it relatively easy to navigate and the technicalities of unit trusts well explained. Unfortunately, as is often the case, with simplification important intricacies are ignored – to the investor’s detriment.

What about taxation?

Because InvestOnline.co.za considers only unit trust products, clients are not informed about other options that could save them a significant amount of tax, for example retirement annuities and endowment policies (for high net worth clients). But even within the unit trust range no mention is made of tax-efficient options, for example funds composed of preferential shares or funds which perform similarly to cash but without the high income tax associated with large sums of interest income. While I appreciate that tax advice is complicated and difficult to automate, I expect an online advice portal to at least flag high-tax paying investors and recommend that they speak to the founders in person about tax-efficient investment options.

The limitations of a risk profiler

With the first test-run of the risk profiler, I answered the questions with myself in mind and was not surprised to see that I’m classified as an aggressive investor – spot on. But when I tried it again, simulating how my semi-retired mother would have answered the questions, I suddenly became concerned. I told the profiler that I’m 65 and absolutely do not want to lose capital, that I may need to draw an income from the product within three to five years and that I have never invested in shares and definitely would not be comfortable trying them now. The profiler told ‘my mother’ that she has a moderate risk profile and recommended a medley of balanced funds (which may all invest up to 75% in shares). This is the same person who phoned me after the 2008 market crash and asked if we shouldn’t perhaps cash in her unit trust, because she hears there’s trouble in the financial markets. (Fortunately, she was invested in a super low-risk protected equity unit trust and suffered only a very brief and minor capital loss). Imagine her reaction if she was invested in a mix of balanced funds at the end of 2008. Who at InvestOnline.co.za manages clients’ expectations and reminds them of their investment strategies when panic sets in?

A great initiative, but perhaps the owners should have spent just a little more time testing their advice process with real-life users before going live.