The Singapore robo-advisors scene is a fast growing one.
FinTech robo-advisors start-ups such as Stashaway, AutoWealth and Endowus have now been joined by local financial institutions such as OCBC RoboInvest and DBS digiPortfolio. Collectively, the amount of advertising dollars being put in by these robo-advisors have led to many investors in Singapore, both new and existing, to take notice of these platforms.
But before you start investing in any of these platforms, it’s worth understanding how these platforms make money, and how this cost can add up (for you), over the long-term.
Most Investments Come With Some Form Of Cost (Anyway)
Like it or not, most investments that we make come with some form of cost. Even investing in the Singapore Savings Bonds (SSB) costs you $2 for each transaction made.
Whether it’s mutual funds, ETFs or even DIY investment portfolios, all of these investments will come with some form of cost, be it an upfront sales cost, a bid-ask spread, an annual management fee or even just an administrative cost. Some investments may charge a combination of these costs.
Does Your Robo-Advisor Platform Give You Access To Investments?
The other thing to note is access.
Some of these robo-advisor platforms such as Endowus and MoneyOwl do provide access to funds which regular investors like you and I wouldn’t be able to buy directly. You can read up more about what both Endowus and MoneyOwl does in the article links.
This is an important factor to distinguish, because it essentially means that to some extent, we are not just paying for portfolio advice and management, but also access to the funds.
Even if a robo-advisor platform only invests in instruments that you can also access on your own, you should to take into consideration trading costs (and not to mention owning a diverse portfolio even with a very small investment).
With that said, let us go into our key topic for this article – fee stacking.
Fee Stacking In Robo-Advisors
Many (though not all) robo-advisors invest in Exchange Traded Funds (ETFs).
For example, StashAway is transparent in letting its investors know that it invests through a combination of 19 ETFs, which in turn provides access to over 14,000 securities. AutoWealth also diversifies its portfolio of investments through index-tracking ETFs. There are other players in the market, but you get our point, many of them create investment portfolios through ETFs.
With an average annual management fee of between 0.5% to 0.88%, robo-advisors are seen by many investors as affordable option to get a long-term, diversified portfolio which provides exposure to major markets around the world. This is as compared to investing through a mutual fund, which would typically charge about 1.5% per annum.
Here’s the thing you may not immediately realise. This management fee paid to your robo-advisor platform is only for managing your funds and involves just one component of all the fees that you may be incurring.
To be clear, there is no “hidden fee” involved. Your robo-advisor platform isn’t hiding anything from you (so don’t pick up the phone and start accusing them of it).
At the same time, it’s important to know that the investments that they make on your behalf, in ETFs, also come with a separate fee.
All ETFs Have Some Form of Management Fee
The reason is simple. All ETFs come with some form of management fee. For example, the SPDR STI ETF has an expense ratio of 0.3%, while the Nikko AM Singapore STI ETF has an expense ratio of 0.33%.
If you think this is low, compare this U.S based ETFs. The Vanguard Total Stock Market ETF has an expense ratio of 0.04%. This means for every $10,000 that you invest, you will pay about $4 in management fee. The SPDR S&P 500 has an expense ratio of 0.0945%.
One thing which strikes out is just how affordable these overseas ETFs are. From a buy-and-hold point of view, the expense ratio charged by these ETFs are very low, especially if you intend to hold them long-term.
If you are buying the same ETFs through a robo-advisor, you will be incurring an additional layer of fees each year. Even at just 0.5% p.a, this could easily represent 5 times the fee you pay compared to investing in these ETFs on your own. So what exactly are you paying 5 times more fee for?
Quality of advice: Robo-Advisors, as their name suggests, are meant to advise you on your investments. As written by Michele Ferrario, Co-Founder and CEO of StashAway in an article we published on DollarsAndSense, technology has enabled online wealth managers or “robo-advisors”, to disrupt the traditional fee paradigm by allowing individuals to get even better services at a lower cost. It’s not just the digital wealth managers’ low fees but their personalisation and convenience at a fraction of the cost of traditional advisors that really make robo-advisors so compelling.
Investment Methodology: Similar to traditional financial advisers, each robo-advisor platform has its own investment methodology it abides by. This investment methodology is what separates them from one another, or the reason why you shouldn’t just park your money with a random personal banker whom you just met at the bank.
If you intend to invest through a robo-advisor platform, this is the biggest factor, in our opinion, that you should base your decision on. At the end of the day, you want to invest your money with a robo-adviser platform that you can identify with, and not just base your decision on the costs involved.
Asset Allocation: The management fee that you pay to your robo-advisor would include not just buying and selling the ETFs, but also the asset allocation and portfolio management and adjustment that will be required over time. If you were to do this on your own, it will not only cost you money and time, but you would also need the right knowledge and skills to do so.
In our view, robo-advisors are great solutions for new investors who may not be inclined to invest on their own at the start, or even experienced investors who do not have the time to adequately manage their own long-term or ETF-based portfolio.
So while they offer a good solution to investors, we think it’s important for you to know that these services provided by robo-advisors do not come for free, and that at the end of the day, you (or your investment returns) are paying for these services.
Ultimately, doing it on your own still contain some financial benefits, provided you have the time and knowledge to do so.
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