👾 In the age of AI, are robo-advisers the way to go? 

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📝 Things to know about robo-advisers

What is a robo-adviser? A robo-adviser functions as a digital financial adviser that offers automated financial guidance and investing services for users. Interested investors typically fill up a survey on the platform indicating their investing preferences and goals, which the robo-adviser takes into account in making investment recommendations. Minimal to no human advisory services come into play here. 

How did they come about? For the uninitiated, robo-advisers emerged after the global financial crisis in 2008. They came to the market with the promise of making investing easier. They recommend investment products based on an individual’s circumstances and risk appetite, but use algorithms to do this instead of consulting a personal financial adviser.

Examples of robo-advisers here are Syfe, StashAway, Endowus, MoneyOwl and Kristal.AI. Banks also offer robo-advisory platforms, such as OCBC RoboInvest and DBS digiPortfolio. 

Who should use robo-advisers to invest? If you’re starting with a small amount of capital and want to learn more about how best to invest your money, but prefer little to no interaction with anyone in the process, a robo-adviser might be worth a try. 

Typically, a robo-adviser charges lower fees than a financial adviser. Financial advisers typically charge 3 per cent of your portfolio, whereas robo-advisers will charge less than 1 per cent.

For example, Syfe charges management fees of 0.1-0.65 per cent per annum of one’s portfolio (depending on the type of portfolio you choose). MoneyOwl and Kristal.AI charge 0.5-0.6 per cent and up to 0.3 per cent per annum, respectively. 

Here are some pros to using a robo-adviser:

• High level of accessibility: Many robo-advisers are easily accessible online or via mobile apps, where investors can start investing with minimal initial capital and without the need for in-person meetings.

• Ease of use: A good number of robo-advisers have more intuitive UI/UX features, which help many users new to investing to get started. 

• Time-saving: Investors need not actively manage their portfolios, saving time and effort, as the robo-adviser handles investment decisions.

• Emotion-free investing: Robo-advisers make investment decisions based on algorithms and historical data, which can avoid certain emotional biases that independent investors can easily fall prey to and negatively affect their decision-making processes when investing.

😶‍🌫️ Lacking a human touch

Can a robo-adviser make good decisions? According to Singapore Management University (SMU) associate professor of finance Hu Jian Feng, the amount of investor profiling robo-advisers offer is inadequate; and the product isn’t as advanced as it seems.  

“The value proposition of a financial adviser has to come with personalisation,” Prof Hu says in an interview with Thrive. “Unfortunately, we are currently far away from that, (even with robo-advisers).” 

“All the robo-advisers can do is create some sample exchange-traded fund (ETF) portfolios, followed by risk profiling, before placing investors into these sample portfolios,” he adds. 

Prof Hu also notes that an investor can save more on fees by investing in stocks and shares on their own, as opposed to using a robo-adviser. Some brokerages have trading fees of as low as 0.03 per cent, with free trade offerings for account holders from time to time as well (although do watch out for hidden fees!).

Other cons in using a robo-adviser to invest include: 

• Over-reliance on past performance: Robo-advisers often rely on historical market data, which may not always accurately predict future performance of all stocks and shares. This could, in turn, lead to potential investment risks.

• No guarantee of returns: The performance of all portfolio offerings often varies; so there is no guarantee of a certain level of investment returns, even after investors pay a fixed fee to the robo-adviser. 

• Lack of flexibility: Investors with complex financial situations or changing circumstances may find robo-advisers less adaptable or not as well equipped to advise dynamically when compared with human advisors. For these cases, a robo-adviser might not be the best fit for these individuals. 

👍 Choosing based on needs

The way Prof Hu sees it, one robo-adviser route to try would be the ones affiliated with banks. “Bank-affiliated robo-advisers’ advantage is that of credibility,” says Prof Hu. “Banks (generally) have established a reputation (for themselves); and in this business, trust is very important for investors to choose the right service provider.”

That being said, while investing through a bank might be convenient, product choices could be limited and higher fees could come into play. 

DBS digiPortfolio and OCBC RoboInvest charge annual management fees of 0.75-0.88 per cent per annum – slightly higher than the average of 0.4-0.6 per cent per annum that non-bank affiliated robo-advisers charge.  

Prof Hu suggests you choose an investment platform based on your needs. “It’s not about thinking that you can beat the market – that would require skills and knowledge that regular investors might not have,” he says. “It’s about understanding what longer-term financial goals you might have, be it planning for retirement or having kids, and being able to best prepare for them.”  

TL;DR

• Robo-advisers provide investment management services primarily driven by algorithms with limited human interaction

• Generally, robo-advisers offer lower fees (compared with having a financial adviser 🙋🏻‍♂️) and are easy to use for beginner investors 👍

• Unfortunately, robo-advisers cannot escape the lack of personalisation 👻 that in-person financial advisers offer 

• To some, bank-affiliated robo-advisers can be regarded as more credible… 

• …although fees could be higher than other robo-advisers in the market