Robo-Advisors for Dummies

What are Robo-Advisors ?

Robo-Advisors are seen as the “shiny new toy” in the investing world and are supposedly designed to construct a personalized financial plan and investment portfolios that reflect individual investors’ preferences and that perform best in the current economic conditions.

How do they work ?

One of the key selling points of robo-advisors is the convenience of setting up and maintaining an account. To set up an account, investors have to complete a simple questionnaire which contains questions regarding one’s personal information, financial management, investment goals and their risk appetite.

Next, investors would be presented with various investment portfolio recommendations generated based on the site’s algorithm and one’s answers from the questionnaire. Upon review and acceptance of the Robo-Advisor’s recommendations, investors may transfer in a lump sum or make monthly payments, and the Robo-Advisor then makes regular purchases and re-balancing for a small percentage based fee.

Whether working, travelling, or sleeping, it is claimed that the system will be tracking economic data to attempt to look for opportunities to maximize returns and manage risk levels for the medium to long term.

Why choose Robo-Advisors over traditional means ?

Robo-Advisors boasts several advantages such as:

  • Beginner Friendly: Catered for first time investors with limited investment knowledge and are unsure of where to park their money
  • Time-saving: For investors who want to invest but have limited time to conduct market research and monitoring.
  • Cost-effective: Robo-advisors charge “relatively low fees”. They don’t have any upfront fees, but do impose an annual management fee (typically less than 1%) which are definitely lower than unit trust funds and traditional financial advisors.
  • ‘Tailor-made’: The system determines the best asset allocation for personalised portfolios based on individual investment preferences, risk tolerance levels and current economic conditions.
  • Diversification: The portfolios have differentiated and global asset classes, such as stocks from a variety of sectors from around the world, bonds issued by governments and corporations, and gold. This level of diversification minimizes the unsystematic risk of individual asset classes and aims to provide a holistic portfolio for investors.

Are Robo-Advisors all rainbows and unicorns ?

Here are some downsides of utilizing robo-advisors:

  • Not Extremely Flexible: While one of the main selling points is that these portfolios are ‘tailor-made’, can the algorithm really determine and subsequently, tailor one’s portfolio based on a 20-25 question questionnaire?
  • Fees are not THAT low: Although it is agreed that the fees are relatively lower than traditional financial advisors, investors are still exposed to currency conversion fees and dividend taxes.
  • Cannot Handpick: One also lacks the ability to pick their own securities to add to their own portfolio and must invest in accordance to the site’s algorithm.
  • Unique Risks: Faulty algorithms and cyber threats are some examples of the “unique risks” of the robo-advisory business model.

Are these Robo-Advisors regulated ? 

The MAS currently classifies robo-advisors as financial advisors in accordance with the Financial Advisers Act. However, most robo-advisors in the market are currently structured and licensed as fund managers under the Securities and Futures Act. As such, this may pose as a risk to potential investors as robo-advisors not be as stringently regulated in the aspect of financial advisory services.

That being said, investors need not fret as the growing popularity and complexity of robo-advisors has led to MAS taking additional steps to introduce new rules and regulations in recent years to protect retail investors.

What is available in the market today?

In conclusion …

Some investors may not be able to sleep peacefully without knowing the qualitative and quantitative analysis framework placed behind such robotic algorithms.

It is paramount for investors to be comfortable with his/her investments. Should investors feel uncomfortable with completely relying on algorithms to drive personal wealth growth, it is advisable to fall back on human financial advisors to structure and monitor your investments instead.

Nevertheless, the strong technological advancements and low-costs of robo-advisors present a strong case for consideration as an passive investment vehicle and thus should not be overlooked during the long-term wealth accumulation process.

Stay tuned ! Till next time …



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