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Robo Investing In Singapore: What Exactly Are You Getting (And Paying For)?

Robo advisors are not all designed the same way.


In the past few years, robo investing has proliferated in Singapore with many new investors choosing a robo-advisory platform, or even multiple platforms, to get started on their investment journey.

The key value proposition that robo investing offers investors is simple. Give us your money, choose an appropriate risk tolerance level and we will help you invest. It’s like an omakase meal…just trust us.

But is that really all investors need to think about?

Not really.

The general premise of robo investing is that it should be simple, like booking a private-hire ride or ordering food online. As users/investors, what we ultimately care about would be the outcome and that is to make money, not so much the nitty-gritty details in between.

However, the idea that we can just give our money to a robo advisor to invest and not need to care about the details of what happens is overly simplistic.

What Exactly Do Robo Investing Offers Us?

All robo advisors will charge us a fee to help us with robo investing. This is usually an annual management fee of less than 1.0% with the actual amount based on our asset under management. For example, if the fee is 0.5% per annum, this means for a $100,000 portfolio that we hold with the robo advisor, we pay $500 each year in management fee. Robo advisors make more revenue from us when our portfolio increases in value and that is how they get paid (by us).

Some investors may just look at fees. After all, one way to increase our total returns is to minimise our costs. This is a concept that robo advisors themselves like to expound, and rightly so. Before robo advisors, the fees we have to pay for mutual funds are typically higher at about 1.0% or more. Sometimes, it’s the fund managers that end up becoming rich thanks to the fees they earn rather than the investors.

But just looking at fees only doesn’t make sense. After all, fees are what we pay to a business in exchange for the products and services that we receive from them. So, what exactly are we paying for when we invest and pay a robo advisor?

Robo Investing Gives Us Access To The Financial Markets

With traditional brokerage firms, we pay a commission for our trades and that allows us to access the financial markets. For example, if I want to invest in SingTel, I need to use a brokerage firm to access the SGX and the broker is the one that helps place orders on my behalf. I need an intermediary and this is just how the financial world works. I can’t just go to NTUC FairPrice and buy some SingTel shares for myself.

When we pay a robo advisor, part of the fees that we pay them is for the ability to access the financial assets that we ultimately would be investing in, whether it’s ETFs or mutual funds. We are paying for access.

This doesn’t mean that we can’t invest in these financial assets on our own. For example, with robo advisors that build a portfolio across ETFs, technically, we can invest in any or all these ETFs on our own as well. For mutual funds, this could be slightly tricker as some funds could be made available only to certain investors or are not sold directly to individual investors.

We Have To Be In Agreement To The Investment Methodology & Selection Of The Robo Advisor

When we invest, returns are what we are aiming for. Naturally, as investors, we will judge the quality of the robo advisors that we invest in from the returns they earn us, or the losses we incur.

However, it’s worth pointing out that robo-advisors themselves are not hedge funds or venture capitalists. While they invest on our behalf, they don’t usually make direct investments into companies or stocks that they think would do well.

Instead, most would invest our money through other funds such as ETFs and mutual funds. When these funds do well, the robo advisors deliver better results to their investors after accounting for the management fee. If the funds don’t perform well, then returns will be lower and you still must pay the management fee. It’s the underlying asset – in this case, the funds that are invested into – that delivers us the returns.

What robo advisors do is use their expertise to select the ETFs or mutual funds that their investors invest in. These investments are made in line with the robo advisor’s own investment methodology.

And here’s the part that confuses many people. While the initial fund selection and investment methodology are designed by the robo advisor, how they manage their asset allocation could be done in an active or passive way.

What many investors don’t realise is this. The investors’ actions alone don’t determine whether they are active or passive investors. For example, we may think we are passive investors because we invest the same amount each month into the same platform but if the robo advisor is actively managing the investments, then we are, by extension, active investors – even if we think we are passively investing.

The point here to remember is that we need to choose robo advisors that are going to be aligned with our long-term investment belief and preference, as opposed to just assuming that all robo advisors offer the same investment approach. After all, we are paying for their investment expertise when we choose robo investing.

Even with the same robo advisors, different portfolios offered may give you exposure to different sectors. A clear example here will be the Syfe REIT+, which as its name suggests, is a portfolio focused on REITs. Thus, if you invest in this portfolio, you can expect the returns to be somewhat uncorrelated with other robo portfolios that invest in the broad-based market index.

We Are Paying For Asset Reallocation

As a natural extension of their robo investing service, asset reallocation is automatically done by the robo advisors for their investors to ensure that portfolios are constantly balanced to the ideal asset allocation that has been set at the start of the investment journey in accordance with our risk tolerance level.

Asset reallocation is an important component of investing. Good asset allocation can give us good, long-term returns during good times while still adequately protecting our investment portfolios during bad times. It also comes at a cost. If you have your own DIY-investment portfolio, you will spend lots of time and money constantly rebalancing your portfolio especially during volatile periods. This is something that we are also paying for when we invest through a robo advisor.

For example, Endowus offers the Endowus Fund Smart that gives its investors the choice and control over which funds they want to invest in, and the desired portfolio allocation. After the investor has decided on this, Endowus helps investors to enjoy a hands-off approach towards managing their portfolio. In other words, investors get full control and choice over the funds they want to invest in while Endowus helps them manage the asset allocation over the long-term. Of course, Endowus also helps curate the funds to ensure they are best-in-class and will also warn you if the customised portfolio you have designed falls outside of your risk tolerance level.

Read Also: How Endowus Fund Smart Can Help Investors Create Their Own Best-In-Class Unit Trusts Portfolio In Singapore

All robo advisors (should) have an investment methodology that isn’t black-box investing. You can, and should, try to understand their investment approach before deciding if you want to invest with them. The robo advisors are unlikely to stray away from their investment methodology.

However, assuming that asset allocation is 100% automated without human interference for all robo advisors is a misconception. This isn’t true. Robo advisors who manage our wealth do have some discretion to choose the ETFs and funds they wish to allocate money to, in accordance with the investment methodology they have put forward, and the asset allocation breakdown that you have opted for.

Put simply, if you choose an 80:20 asset allocation with 80% exposure to equities. The robo advisor will (have to) follow that allocation. However, what is within the 80% could change over time, in accordance with their investment methodology.

Robo Advisors Are Not Built The Same

While the main value propositions for robo-advisors are generally similar – to help us build up our wealth over time in a low-cost, hands-off manner, it would be incorrect to say that robo-advisors, both the ones operating in the industry today and newcomers in the future, are all the same.

Without going into specific details in this article, most robo advisors in Singapore currently have different investment approaches and it’s important to understand the investment methodology of any robo advisor before we invest with them. And once we do our part to understand the differences, we may find that there are more differences between them than we initially may have thought and have a greater conviction to choose one over the other.

Read Also: Robo Advisors In Singapore (2022): What You Need To Know Before Investing

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