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LOW-COST, efficient portfolios for retail investors willing to take the digital or robo advisory route could soon become more widespread.
More than a handful of digital advisory firms have already obtained licences as financial advisers or fund managers. Based on initial indications, portfolio fees are a fraction of those charged by unit trusts and investment-linked insurance funds.
The Monetary Authority of Singapore (MAS) has proposed to facilitate the offering of digital advisory services, while still adhering to the regulatory framework that governs financial advisors and fund managers.
Based on the consultation paper it released on Wednesday, digital advisory firms will not be separately licensed. Instead, they will be offered significant concessions; it has been proposed that digital advisers who go the fund-management route and target retail investors be exempted from meeting the track record and minimum assets under management (AUM) requirements.
Traditional fund managers who cater to retail investors need to have AUM of S$1 billion and a five-year corporate track record in order to earn a licence to provide full capital-markets services (CMS).
However, digital advisory firms must comply with some safeguards. One is that portfolios must be diversified and comprise non-complex assets. Another is that the firms must have key management staff with relevant collective experience in fund management and technology. They must also undertake an independent audit of the business within a year of operation.
Digital advisers who operate as licensed financial advisers will also be allowed to execute investment transactions and rebalance client portfolios in collective-investment schemes without the need for an additional licence under the Securities and Futures Act.
Non-digital advisers will also be exempted from this.
Digital advisers can also seek exemption from the requirement under the Financial Advisers Act to collect the full suite of information on clients' financial circumstances, such as details of their income level, subject to a number of safeguards.
These safeguards include the provision of advice only on exchange-traded funds (ETFs), controls to filter out unsuitable clients and identify inconsistent responses, and the provision of a risk-disclosure statement that alerts clients to the limitations of the advice.
In a statement, MAS said that it has received "indications of interest" from new entities seeking to offer digital advisory services to retail investors, and that the proposals seek to support innovation in financial services by recognising the unique characteristics of digital platforms.
"The availability of digital advisory services will widen investor choice to low-cost investment advice."
Existing licensees do not need to obtain MAS approval to offer digital services. OCBC recently announced its plan to launch a robo advisory service in partnership with WeInvest, targeted at accredited investors.
MAS said technology risks such as erroneous algorithms and cyber threats must be managed. It has set out expectations on the governance and management oversight to be adopted by digital advisers, including the need for a robust framework to govern the design, testing and monitoring of algorithms. The public consultation ends on July 7.
Varun Mittal, EY Asean fintech leader, said robo advisory has the potential to reach client segments under-served by financial institutions. "In light of all advantages, one also needs to be cautious of implications of reliance on machines, which are ultimately designed and controlled by humans, to keep the interests of investors at the highest priority."
Ow Tai Zhi, chief executive of Autowealth, was heartened, in particular, by the greenlight given to rebalance clients' portfolios and the waiver of a corporate track record requirement. "Most fintech companies are start-ups. If we don't have a licence, how would we be able to bring innovative technology to benefit people?"
Autowealth started offering its digital service to early adopters in the second quarter of last year. 2016.These investors had to invest a minimum of S$30,000, but now that it is able to cater to retail investors, the minimum investment size has been brought down to S$3,000. In the last 12 months, the average investment performance was 9.9 per cent net of fees. The annual portfolio fee is 0.5 per cent.
The firm's engine takes a rules-based approach, emphasising diversification across asset classes, geographies and industries. The underlying instruments are ETFs.
Said Mr Ow: "We estimate that the annual management and front-end fees of unit trusts are probably around 2 per cent per annum, which goes to fund managers and sales people. Digital advisory capitalises on technology to replace processes that are costly, such as financial middlemen, and pass on the savings to investors."
Stashaway has received a CMS licence and expects to begin to offer its services within a few weeks. The firm's co-founder and chief executive Michele Ferrario said "a few thousand" people are on Stashaway's waitlist. The firm does not set any minimum investment amount. Annual fees start at 0.8 per cent for a total investment of S$25,000. This dials down to just 0.2 per cent for amounts above S$1 million. "Our product services the needs of those who are just starting out and have not saved much so far, as well as more sophisticated investors who can put together a few hundred thousand or a couple of million dollars, and appreciate the sophistication of our framework and low fees." Stashaway portfolios will be invested in ETFs.
Mr Ferrario said the objective is to try to whittle down Singaporeans' exposure to cash. "Rather than compete with banks, we provide a different value proposition. We hope to make it easier for Singaporeans to take a more proactive approach to their savings."
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