Short answer: An easier way to invest with lower fees!
In the past, mutual fund managers basically pulled together funds and charged a hefty 2-3% management fee for trying to beat the market. The fees usually eat into returns in the long run and thus the ones who benefited ultimately were the fund managers. Robo-Advisors aim to change that.
Long answer: Low-cost Diversified Passive Investing
- Low Cost: Usually 0.5% to 1% fees are charged for total amount managed (because they are run by models and algorithms behind instead of fund managers, hence the word ‘Robo’)
- Diversified: Usually put into a basket of Global Exchange Traded Funds (ETFs) which exposes the fund to the global economy in different sectors in some form of a mix of equities and bonds. Some of these ETFs are not available to retail investors.
- Passive Investing: A longer-term approach to growing wealth rather than high-frequency trading and taking short-term positions.
The target market is the time-starved working adult with income and looking to grow their money passively (the bulk of Singaporeans today aged between 21 to 45). Rather than going down to the bank to look for a relationship or fund manager, why not engage a more transparent way to grow your wealth.
5 Commonly Asked Questions
At a recent Seedly Community Special AMA – “Ask Me Anything” with Stashaway (one of the main 3 Robo-advisors here in the Singapore market) Autowealth and Smartly being the other two as well. We sat down with Michele Ferrario, CEO and Freddy Lim, Chief of Investment, to go through some of the common questions people ask about Robo-advisors.
1) How is this different from Mutual Funds?
- The biggest difference is that these Robo-advisors are usually run by algorithms and methods rather than analysts and traders behind the scenes
- Next is the strategy: Fund managers in mutual funds aim to outperform the market but for Robo-advisors, they buy into global ETF (exchange-traded funds) so these are the indexes*.
- You can see more in the chart which we detail it below (with a hypothetical ~8% return, how fees can affect this) Check out the Orange line!
*What is an index: For example, the Straits Times Index tracks the top 30 companies in Singapore. Robo advisors usually buy Index funds in US that tracks S&P500 (the top 506 companies in the US market)
2) What investment strategy do you use?
The 3 different Robo-advisors use different strategies but let me list them down in plain English here. I have given a short explanation for each, but definitely look to go deeper in the links provided!
- Stashaway: Economic Regime Asset Allocation (adjusts to 4 different economic cycles based on risk profile)
- AutoWealth: Rule-based allocation (fixed way of allocation based on risk profile)
- Smartly: Modern Portfolio Theory (maximising returns based on risk profile)
3) How much can you start with?
- Stashaway: S$100 to open an account and can contribute on a monthly basis (no withdrawal or closure fees incurred)
- AutoWealth: S$3,000 to open an account and can contribute on a monthly basis (no withdrawal or closure fees incurred)
- Smartly: S$100 to open an account and can contribute on a monthly basis (no withdrawal or closure fees incurred)
4) What are the returns someone can expect?
Disclaimer: This is highly subjective and fluctuates as any market portfolio would, but this was what we found
- Stashaway: Based on our chat with them, the YTD (Year to date) returns have been around 5.5% for the lowest risk profile and around 11% for the highest risk profile (growth portfolio)
- AutoWealth: Based on their website, we found that their returns have been around 10.4% so far
- Smartly: We don’t have information and it is not on their site so we cannot comment on the returns for Smartly so far (please reach out if you do!)
5) What are the risks associated?
The risks for all these players are generally the same, let us explain further.
- Market Risk: As with any economy, they are bound to cycle up and down. Based on when you enter and exit the market. However, over a longer period of time 10 or more years, the returns are generally and historically on the uptrend if you bet on the indexes!
- Company Risk: This is low to zero. If you look further, the 3 players are all run almost like funds (albeit different regulatory structure). Where their funds used for investment are kept separate from the company funds. So in the event that these companies go bankrupt, there would be recourse to get your holdings and investments back.
- Quote: “You still own all the underlying securities in your portfolio as your money is held in a segregated account. There isn’t a risk of your funds being accessed by creditors etc.”
Conclusion – Consider Robo-Advisors for the longer term
For a more detailed study and comparison, you can head over here to the breakdown between Stashaway vs AutoWealth vs Smartly
Personally for myself, also as a time-starved working adult, this has been a very viable solution for me to consider apart from betting on the STI ETF, as this gives me global exposure to markets like the USA and Asia (excluding Japan) 🙂
Next AMA – 12th October 2017, Thursday 8pm
“Your Insurance, CPF and Retirement Planning”
We’ll be hosting a panel with Val from PolicyPal, Christopher Tan from Providend and Eddy from DIYInsurance to uncover the truth behind what insurance you need and also, other ideas of how you can not overpay.
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