Investing with robo-advisors

If you’ve only got a minute:

• A robo-advisor is catch-all term for investment managers and software that use algorithms to administer your portfolio.
• The relative simplicity of setting up an account and making an investment is one of the main reasons why robo-advisors have gained popularity.
• With DBS digiPortfolio, whether you’re looking for low-cost investments, income generation, retirement planning, or simply want to grow your wealth for the long term, there’s a portfolio to suit your investment needs.

The popularity of robo-advisors among retail investors is unsurprising, as they simplify investing by offering readily available and well-diversified portfolios. In fact, the global robo-advisor market has grown significantly, expanding from US$6.36 billion in 2023 to US$8.01 billion in 2024. This upward trajectory is expected to continue with a compound annual growth rate of 26.7%, reaching an estimated US$33.38 billion by 2030.

Robo-advisors reflect a growing trend - the democratisation of wealth management services. Today, Investing is more accessible than ever, with a wide range of robo-advisory products available from both established financial institutions and new entrants to the market, making it easier for everyone to invest.

The viability of robo-advisory products has also been fuelled by the broader trend of digitalisation, where in recent years, technology has been playing a greater role in the investment decision process.

Whether you're a novice investor or simply seeking to learn more about robo-advisors, this guide will provide you with a comprehensive overview.

The essence of robo-advisors

Robo-advisors are often viewed as digital platforms that provide automated, algorithm-driven investment services with no human intervention. But it is actually a catch-all term for investment managers and software that use algorithms to administer your investment portfolios.

This includes hybrid robo-advisors like DBS digiPortfolio, where portfolio managers make investment decisions while certain processes like back-testing, rebalancing and monitoring, are automated.

The relative simplicity of setting up an account and making an investment is one of the main reasons why robo-advisors have gained popularity.

All you have to do is answer a few simple questions through a questionnaire about your age, investment experience, investment horizon, risk tolerance and investible savings.

An investment portfolio will then be picked, where you will be allocated either a: 1) conservative, 2) moderate or an 3) aggressive portfolio.

For example, a conservative investor (e.g. someone nearing retirement) will have a high allocation to safer assets such as government and investment grade corporate bonds. Meanwhile, a more growth-focused investor will have a high allocation to equities for potentially higher returns in the long-run.

Broadly speaking, robo-advisors tend to adopt passive investing strategies with exchange-traded funds (ETFs) and unit trusts as the main underlying instruments.

As with all investments, robo-advisors come with their own risks as they may employ different strategies. As such, it is prudent to do your own due diligence.

Read more: digiPortfolio - A robo-advisor for all
Find out more about: DBS digiPortfolio

Pros of investing with a Robo-advisor

Robo-advisors offer unique benefits for retail investors.

1. Low barriers to entry

With minimum investment sums ranging from S$1 to S$1,000, and the ability to add funds regularly through dollar-cost averaging (DCA), robo-advisors are accessible to those just starting out on their investment journey.

Moreover, robo-advisors offer a simpler alternative to building a stock portfolio from scratch. They eliminate the need for stock-picking expertise and reduce transaction costs that come with building a portfolio with individual stocks.

With DBS digiPortfolio, first-time investors can build portfolios using a selection of diversified ETFs and unit trusts, which give you exposure across markets (e.g. Asia, global) and asset classes (i.e. stocks, bonds and alternatives). A minimum initial investment of S$100 is required, with recurring top-ups of at least S$100 — easily automated for your convenience.

By doing so, it takes the emotions out of investing and avoid timing the market which is challenging even for experts. Time in the market is preferred so as to ride out the volatility over the long run.

2. Diversification

By diversifying your portfolio with different financial instruments, you can reap the rewards of investing by maintaining a low overall exposure to risk and mitigating losses during market downturns.

Robo-advisors use algorithms and established methodologies like modern portfolio theory to create and maintain optimally balanced portfolios that maximise returns for a given level of risk.

Even with small initial investments, robo-advisors can build diversified portfolios across asset classes and markets through ETFs and unit trusts with their own diverse underlying holdings.

Read more: Diversify to help manage investment risks

3. Passive investing strategies

Unlike active trading strategies that frequently buy and sell investments based on short-term performance, robo-advisors typically employ passive investing strategies.

This approach, which sees investors "buy and hold" investments while focusing on long-term growth, may be a more suitable strategy for many individuals.

For those who are busy balancing work and other commitments or lacking the expertise to constantly monitor the market, this “hands-off” approach may be a practical and appealing option.

There is also the question of rebalancing, which is the process of realigning the weightings of the different asset classes within an investment portfolio, periodically.

While rebalancing is one of the most critical parts of managing a portfolio, it can be difficult depending on your investment experience. Robo-advisors take away this conundrum and even helps you to rebalance your portfolio automatically.

4. Lower fees

Passive investing strategies employed by robo-advisors generally have lower fees than actively managed strategies. This is a significant consideration for retail investors, as high fees can significantly reduce investment returns, especially over the longer-term.

Most robo-advisors in Singapore charge annual fees of between 0.5% and 1%, others charged tiered fees depending on how much you invest. Fees listed are often “all-in”, but there may be hidden fees depending on the underlying investment vehicles.

At the end of the day, robo-advisors offer a cost-effective solution for investors seeking affordable, professional investment management and well-diversified portfolios.

Cons of investing with a robo-advisor

Robo-advisors, while convenient and affordable, may not offer the personalised advice and flexibility of a human financial advisor.

1. Lack of human guidance

With robo-advisors, the lack of human and personalised guidance can be a disadvantage, especially if individuals have little to no knowledge of investing.

In this case, they might do better with a human adviser, who is able to address questions and correct misconceptions while providing guidance as market conditions change.

That said, this can be addressed by taking the time to build up your investment knowledge, which can give you good grounding to avoid making impulsive withdrawals, neglecting regular contributions, or trying to time the market.

2. Lack of flexibility

Robo-advisors appeal to many because they offer readymade portfolios based on established investment strategies.

While suitable for passive investors who prefer a “hands-off” approach, this lack of control may frustrate those who prefer being more actively involved. In other words, the limited customisation options of robo-advisor portfolios become a constraint.

Although the fees charged by robo-advisors are typically reasonable, if you would prefer the flexibility of building your own portfolio with ETFs, it may be in some cases, cheaper to do so. After all, there is some cost (though not much), for that convenience of using a robo-advisor.

Core-satellite approach

If you prefer a “hands-off” approach to investing but still want some flexibility, you can consider employing the core-satellite approach to portfolio construction.

The goal of the core-satellite approach is simple: Achieve market average returns with a stable “core” of long-term investments while aiming to capture above-average returns with the tactical “satellite” component.

With this in mind, a globally diversified robo-advisory portfolio can form the “core” while the “satellite” is constructed with ETFs and unit trusts that will need to be actively managed.

Read more: What is a core-satellite portfolio?

Where does DBS digiPortfolio come in?

With hybrid robo-advisors like DBS digiPortfolio, investors can benefit from DBS’ elite team of portfolio managers, whose expertise was previously accessible to only those with investable funds of S$500,000 and above.

Besides carefully selecting investments to create quality portfolios, the team of portfolio managers monitors the market regularly, aligning digiPortfolio with DBS Chief Investment Office’s views to ensure optimal asset allocation and portfolio resilience, and initiating rebalancing whenever necessary.

With DBS digiPortfolio, certain processes like back-testing, rebalancing and monitoring are automated.

Whether you’re looking for low-cost investments, income generation, retirement planning, wealth preservation or simply want to grow your wealth for the long-term, there’s a portfolio for investment needs.

In summary

Robo-advisors offer simple, diversified, and low-cost investing, appealing to both beginners and seasoned investors seeking automated portfolio management.

However, do remember that investing is just one component of a holistic financial plan. Other aspects include having credit management, adequate insurance coverage, home planning as well as retirement and estate planning.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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