How to start investing with a robo-advisor
If you’ve only got a minute:
- Robo-advisors are digital platforms that provide automated, algorithm-driven investment services with little human intervention
- It is important to understand that most robo-advisors provide investment services, not financial planning
- Robo-investing is not a “sure-win” investment strategy that beats the market every time. The returns from a robo-advisor will depend on your investment horizon and the amount of funds you have invested.
In the last few years, robo-advisors or robo-investing stormed into Singapore and has become increasingly popular. It is no longer a novelty. Even mainstream banks, such as DBS has a robo-investing platform digiPortfolio! For those who have not jumped on-board yet, are you curious about the differences between robo-advisors and traditional investing? Is it riskier or more complicated than buying stocks on your own?
What are Robo-advisors?
Robo-advisors are digital platforms that provide automated, algorithm-driven investment services with little human intervention. You can think of it as an automated portfolio manager that helps you optimise investing strategies after asking you a few simple questions about your investment experience, risk appetite and investment preferences.
What a Robo-advisor is not
It is important to understand that most robo-advisors provide investment services, not financial planning. While both are critical to help you achieve financial wellness, they aren’t the same. Financial planning is more holistic and looks at your current financial situation, identify the gaps and maps out strategies to close them. It is an ongoing process that requires personalised attention and accountability.
On the other hand, investment management services from a robo-advisor offer options and solutions for investment only. It does not consider the bigger picture of your overall financial situation. This includes cashflows, debt management, insurance, home planning, retirement and legacy planning.
How Robo-advisors work
A new customer signing up for a robo-advisor usually starts by answering a simple online questionnaire about their investment goals. These questions may include your age, investment horizon, risk tolerance and your investible savings. Robo-advisors then run those answers through an algorithm and uses an asset allocation approach to build a portfolio that is aligned to your risk profile and that meets your goals.
Robo-advisors usually provide a fixed set of portfolios that cater to investors with a broad range of risk appetite. For instance, on the most basic level, it could include 3 types of portfolios that cater to investors who are 1) conservative , 2) has medium risk tolerance or 3) has high tolerance for higher risk for potentially higher returns.
For example, if you are a 27-year-old “aggressive” investor, the robo-advisor might make a recommendation for a portfolio with 90% equity investments and 10% bonds.
Once you have funded your account, the software will invest your capital based on the portfolio allocation – no complicated investment decisions or worrying about whether you are executing your trades correctly! It will also automatically help you to rebalance your portfolio regularly to ensure that it remains close to your target allocation.
Risks associated with Robo-advisors
Like most investments, robo-investing is not a “sure-win” investment strategy that beats the market every time. As the underlying instruments are exposed to market risk, when the general market falls, your returns may decline as well.
The returns from a robo-advisor will also depend on your investment horizon and the amount of funds you have invested. As most of the managed portfolios are set up for a long-term investment horizon, you should ensure that the funds you’ve invested are not needed in the short term. If you choose to withdraw your funds earlier, it could affect the projected returns.
Things to note before investing with a Robo-advisor
In Singapore, robo-advisors are required to be licensed under the Securities and Futures Act (SFA) and/or the Financial Advisers Act (FAA). However, as robo-advisor platforms are considered rather new innovations and MAS does not want to impose too much red tape, there is some leeway created for them.
For instance, robo-advisors can be licensed under the SFA even if they do not fulfil the usual corporate track record requirements; and they can be exempted from the FAA requirement to collect data on clients' financial circumstances, if they have risk-mitigating measures such as questionnaires to identify investors who are not-suited for the investment products they offer.
Other factors that you should consider before choosing a robo-advisor includes
• Minimum investment amount
You can start investing with a robo-advisor from as low as $1, but some requires a minimum investment of $10,000.
Most robo-advisors in Singapore charge annual fees of between 0.5 and 1%. Some charge tiered fees, with cheaper rates when you invest a higher amount. Most of the fees listed on robo-advisory platforms are “all-in” fees, but there could be hidden fees depending on the underlying investment vehicles.
• Underlying investment instruments
Different robo-advisors invest in various underlying investment instruments – stocks, Exchange-traded funds(ETFs), unit trusts(UTs) and commodities. Each comes with its own risks so it will be prudent to do your own due diligence before parking your money with a robo-advisor.
Pros and Cons of investing with a Robo-advisor
1. You can start small
The minimum investment amount is stated upfront, so you know exactly how much you’d need. For instance, the DBS digiPortfolio requires a minimum investment of $100. Unlike buying stocks where there is minimum trade sizes and transaction costs imposed, robo-advisors allow you to own fractional portions of ETFs which is more accessible for retail investors.
2. Passive investing
Most of us do not have the time to check the market or know when it is considered a good entry point. Robo-advisory takes away this conundrum and even helps you to rebalance your portfolio automatically.
3. Diversified portfolio
Maintaining a diversified portfolio is important so that we do not suffer huge losses during a market crash. However, maintaining a diversified portfolio on your own may require large capital and not all of us have the knowledge on how to do it.
Using an algorithm, robo advisors employ well-researched methodologies like modern portfolio theory to construct and balance a mix of assets such that the expected return is maximised for a given level of risk.
4. Low commitment
You can easily liquidate your funds with a robo-advisor, unlike investing in other funds or savings plans with lock-in periods. However, it’s always best to take a longer-term approach as you might not see the desired returns if you choose to withdraw your funds early. This is because time in the market helps to ride out the volatility.
5. Lower fees
Robo advisors generally charge lower fees than professionally managed funds. This is important because fees eat into our returns, resulting in lower gains.
Although the fees charged by robo-advisors are relatively lower than other types of investments, it still presents an additional cost to “DIY”. Thus, you’d need to decide if the value robo-advisors provide is worth the fees you pay for.
1. Lack of human guidance
While the computing power of a robo-advisor can take some work out of investing for you, it still lacks the human guidance that a new investor needs. It will not help you with investing mistakes such as panicking and making irrational withdrawals when the market declines, not increasing your contributions over time or trying to time the market.
2. Lack of flexibility
Although there are certain choices as to what you can customise in your robo-advisory portfolio, it is limited as you cannot deviate from the algorithm’s parameters. Thus, if you prefer to have full control of what you are exactly investing in, robo-advisors are probably not suitable for you.
Who is it suitable for?
Compared to traditional investment advisory, robo-advisors can be a convenient way for those who want to start investing but are not sure how to put together a diversified portfolio that suits their investment profile.
Having said that, there can be a place for seasoned investors as well – those who want to invest a portion of their money into an automated portfolio using a researched-based investment approach.
Robo-investing can also be an option for fee-conscious investors who want investment advice at a reasonable fee, along with well-managed investment portfolios.
A hybrid robo-advisor by DBS – digiPortfolio
Hybrid-investing brings together best of both worlds - the insights, guidance and human touch from portfolio managers, and fuses them with the power of robo-technology.
Here is how we’re doing it at DBS: with digiPortfolio
Retail customers can now gain access to the expert analysis by our DBS investment team while enjoying the automated processes of monitoring and the rebalancing of your investments by robo-technology.
Ready to start?
Speak to a Wealth Planning Manager today for a financial health check, and how you can better plan your finances.
Need help selecting an investment? Try ‘Make Your Money Work Harder’ on DBS NAV Planner to receive specific investment picks based on your objectives, risk profile and preferences.
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.
Disclaimer for Investment and Life Insurance Products