Robo-advisors are digital platforms that provide automated financial management services driven by algorithms at low costs, with minimum or no human intervention.
In other words, they allow you to automate your investments online or via a mobile app, something akin to internet banking.
Low Level Of Entry
Fees and minimum investment requirements are generally lower than employing traditional financial advisors. Some do not require a minimum investment but take a percentage of your investments as a management fee. Others may require a monthly investment or one-time investment of as low as S$100.
The low level of entry makes robo-advisors an attractive option to small investors with simple financial goals, especially for those who are new to global markets or prefer a more passive mode of managing their investments.
Automated Investments Based On your Financial Profile
The sign-up process mostly begins with a questionnaire aimed at assessing your risk appetite. With this information, the robo-advisor builds a portfolio that corresponds with your investment capacity, the current market conditions, and your investment goals.
Once you have deposited or activated your investment payments, your robo-advisor will set your investment in motion. It will monitor the market and rebalance your portfolio to manage risk and maximise potential returns.
Robo-advisors typically invest in US and global exchange traded funds (ETFs) with exposure to a variety of asset classes, including equities, bonds, gold and other commodities.
The first robo-advisors emerged in 2008 during the financial crisis and they have been growing in popularity since. There is now a wide selection of robo-advisors in Singapore, such as Endowus, Syfe, MoneyOwl and Stashaway, which are offering their services to invest your Central Provident Fund and Supplementary Retirement Scheme savings or cash. In recent years, local banks like DBS, UOB and OCBC have also rolled out their own robo-advisors like DBS digiportfolio, UOBAM Invest and OCBC RoboInvest to capture the robo market.
MAS Regulated
With increasing accessibility to such fintech avenues also comes the need for regulations. The Monetary Authority of Singapore requires robo-advisors to be licensed under the Securities and Futures Act and/or the Financial Advisers Act.
Choosing Your Robo-Advisor
Choosing a suitable robo-advisor may be daunting when you are just starting out and faced with so many choices in the market. You can narrow down your options. Start by asking yourself what you want to achieve.
1. Define your goal and decide how much you are willing to commit. Are you planning for a big holiday, furthering your education, or something long term such as retirement? Setting a goal will give you direction and help determine your budget.
2. Compare the fees and minimum investments required by various robo-advisors. Are there other costs, such as transaction fees, on top of the monthly or management fees? As mentioned earlier in this article, robo-advisor fees are structured differently. Always revisit your goal and study each service carefully. Don’t be lured into committing more than you should for the prospect of (but not guaranteed) higher returns.
3. Consider each robo-advisor’s specialty. Many robo-advisors invest mainly in ETFs, with additional specialty areas such as funds and individual stocks. Yet others may focus on sectors such as insurance and healthcare. You may evaluate your preference based on your risk tolerance level, your knowledge of the sector, or even your social values.
Managing Your Robo-Advisor
Even though you have signed up with a robo-advisor, you should not switch to auto-cruising mode from there.
1. Do your due diligence. Bear in mind that robo-advisors are driven by algorithms and do not always provide the context under which the decisions are made. You should do your due diligence by understanding the portfolio that has been created for you.
2. Monitor your investments. Do this regularly and adjust them as you progress in your career, when your life circumstances change, or when there are sudden changes in market conditions.
While employing robo-advisors may sound like an affordable and convenient instrument to grow your savings, they are by no means fortune-tellers. They can’t address your anguish during a significant market drop or egg you on when market conditions are favourable.
The decision on weathering a storm or taking the plunge still lies in your hands.
