If you’re a young Singaporean who wants to start investing, you might be stumped by the dizzying array of investment instruments and asset classes out there. As a busy individual, you may not have the time nor inclination to be constantly monitoring your investments and instead want a way to get passive exposure to the market, based on your risk appetite.
Enter robo advisors. The concept gained considerable popularity in the United States, with big players like Betterment and Wealthfront already having more than S$10 billion in assets under management. In Singapore, robo advisor offerings have started to spring up in the past 3 years. They include StashAway, AutoWealth and Smartly.
What Is A Robo Advisor?
There are many definitions of “robo advisors”, including the original use of describing a digital financial planner that delivers financial advice and portfolio management through a digital platform, rather than face-to-face.
In Singapore, the more common definition of the term “robo advisors” is that which is used to describe platforms that automatically helps you invest your money, based on your risk tolerance and the methodology of the platform, managed with the help of algorithms which have been set in place by these robo advisors.
Before we start, it is important not to be carried away by the marketing hype of artificial intelligence or advanced algorithms. Ultimately, all algorithms are programmed by humans based on financial models and follow a set of rules and instructions.
At this stage, we also want to differentiate robo advisory platforms from platforms such as FSMOne My Assisted Portfolio Solutions (MAPS), which operate more like online investment advisory service that builds, monitor and asset allocate investments on behalf of investors.
Unlike other robo-advisory platforms, FSM MAPS doesn’t completely leave the analysis and investment decisions to a predetermined algorithm. Rather, its portfolio managers and research analysts study the markets and products available in the market to gain the exposure they desire. In otherwords, FSM MAPS, while seemingly similar out the outside, is fundamentally different from the other robo advisors that will be mentioned in this article.
You can read up more about FSM MAPS here.
How Robo Advisors In Singapore Work
1) Sign-up and answer a detailed questionnaire about your risk appetite and intended investment time horizon.
2) Fund your account, either lump sum or you can do monthly option.
3) Upon receiving your funds, your robo advisor will then purchase a mix of ETFs that corresponds to what they consider “optimal” based on your profile and the current market conditions.
4) The robo advisor will monitor the market and perform rebalancing when necessary to manage risk and maximise potential returns.
As far as we can tell, all of the robo advisors make the majority of investments in US and global ETFs with exposure to a variety of asset classes including equities, bonds, gold and other commodities.
Meet The Singapore Robo Advisors
Stashaway was started in 2016 and operates under the Monetary Authority of Singapore’s Capital Market Services Licence (CMS100604-1).
They employ a proprietary investment strategy they call Economic Regime-based Asset Allocation (ERAA), which is based on the theory of economic cycles. Through monitoring changing economic indicators, they rebalance the asset allocation mix of customers’ portfolios accordingly. They hold regular events to share on their investment methodology and how their platform works.
StashAway’s fees range between 0.2% to 0.8% per year, depending on amount invested. There is no minimum amount to start, though to get the very attractive 0.2% rate, you need to have $1 million invested with them.
Started in 2015, AutoWealth has a MAS Financial Advisor Licence (FA100064-1).
AutoWealth’s fees are at a flat 0.5% per year, regardless of total amount invested, plus an annual platform fee of USD$ 18. They do require a minimum of S$3,000 to start investing. AutoWealth has no lock-in period for investments and clients are free to withdraw their investment capital or close the investment account anytime.
Started in 2015, Smartly works with VCG Partners Pte. Ltd., which is a MAS-licensed fund manager. Smartly is a technology provider and does not invest your money directly. Rather, you are technically investing through the licensed fund manager, VCG Partners Pte. Ltd.
Fees for using Smartly are between 1% to 0.5% per year for investments of up to S$10,000 to S$100,000, respectively. There is no minimum needed to start investing and no minimum commitment period.
Reasons You Might Want to Invest with a Robo Advisor
You Don’t Need a Large Amount of Capital
When investing as an individual, there are minimum trade sizes and high transaction costs imposed on the account, and this makes investing as an individual cost-prohibitive. Robo advisors allows you to own fractional portions of ETFs, which is impossible to do on your own unless you have a large capital.
Diversified by Default
Because of the scale that technology enables, robo advisors can offer detailed monitoring of market indicators and apply sophisticated investment strategies based on them, much like what mutual funds provide, but at lower cost.
Rather than needing to pick from a list of mutual funds that you think best fit your needs, robo advisors can give you a portfolio mix that is more finely tuned to your needs (as the robo advisor deems to be appropriate), though not completely personalised on an individual level.
The idea with robo advisors is that you do not need to rebalance your portfolio as market conditions change. Rebalancing is done by robo advisors for you, automatically.
Robo advisors generally charge lower annual management fees than professionally managed funds do. We all know that fees have a compounding effect that eats into our returns, especially over the long term. The higher the fees, the less returns we enjoy for the same amount invested and asset performance.
This point about “low fees” does come with a caveat. While robo advisor fees are admittedly lower than what mutual funds charge, it is still an additional cost that you are incurring, as opposed to buying the ETFs yourself and managing your own portfolio. So you need to decide if the value robo advisors provide is worth the fees you pay, over the long-term.
Reasons You May Not Want to Use a Robo Advisor
Currency Exchange Spread and Risk
Typically, in Singapore right now, robo advisors tend to be heavily invested in US-based ETFs. This means your money will be subject to USD conversions at spot rates, as well as incurring currency conversion fees charged by brokers.
It might be ironic to say that the fees are a reason not to use robo advisors, since they are one of the draws. However, as mentioned earlier, robo advisor fees are recurring costs, which are on top of management fees that ETFs charge.
If you like the benefits of what ETFs offer and are willing to put in some time and effort to do-in-yourself, then you would be able to save quite abit, especially over the longer-term. So you need to evaluate if you really need a “purely passive” option that robo advisors provide, or can spare some time to periodically review and manage your portfolio.
Lack of Flexibility
The whole idea of robo advisors is that you take the emotion out of investing, and that they help you to make “smart” choices based on their algorithms. However, what happens when you do not agree with the choices made by the robo advisor?
If you have a particular opinion or insight that you think isn’t picked up on by the robo advisor, then you might want to give them a miss. Also, you cannot choose a specific ETF to include (or exclude), which can be irritating, since a portion of your money is deployed in something you do not believe in.
Tax On Dividends
Since all three robo advisors buy ETFs listed in the US, your dividends are subject to a 30% dividend withholding tax. What that means is that your dividend returns are lesser compared to buying ETFs listed elsewhere. It is unclear whether the robo advisors take this 30% dividend tax into account when doing their projections.
Before Taking The Plunge to Invest
Here’s a summary of the Singapore robo advisors we discussed earlier.
|Investment Methodology||Proprietary tactical asset allocation strategy based on economic cycles||Market-returns approach with focus on diversification across asset classes, geographical regions and industries||Based on “Noble-Prize winning theories”. Appears to be based on buying diversified ETFs|
|Yearly Advisor Fees||Between 0.2% to 0.8%.||0.5% + USD$18 platform fee||Between 0.5% to 1%|
Comparison Based On The Amount Invested, And The Fees Charged
Some investors may make their decision on which robo advisor platform to use base on the amount they intend to invest. We don’t recommend that you only look at fees only, since the main decision criteria should be whether you agree with their investment methodology in the first place. Take your time to understand the investment methodology of the robo advisor of your choice. As with all investments, do not invest in something you do not fully understand.
However, cost is nevertheless a factor you should not ignore. Here’s a rough guide to the cost that you can expect to incur.
|Amount Invested||Annual Fee: StashAway||Annual Fee: AutoWealth||Annual Fee: Smartly|
Based on USD/SGD exchange rate of 1.34
We cannot emphasise enough that all investments carry risk, no matter how well-diversified. You should not invest money you cannot afford to lose, such as your emergency savings or money earmarked for paying for your home.