SINGAPORE (May 21): Since the introduction of digital advisers or robo-advisers (short for robot advisers), there have been more avenues for small-time or beginner investors to invest their money in properly.

In fact, the global robo-advisers industry is expected to reach a value of US$987.4 billion (S$1.38 trillion), a 19.3% y-o-y growth in 2020, according to data gathered by BuyShares.

Before that, investors either had to do their own research and go it alone, or put their money with a financial adviser or portfolio manager.

The former requires time, effort, and in-depth knowledge, while the latter usually comes with high fees, or­­ was limited to high-net-worth individuals.

In contrast, initial investment amounts for robo-investing platforms tend to be lower compared to traditional investment channels, according to OCBC Bank’s head of wealth advisory, Kelvin Goh.

Citing OCBC’s RoboInvest as an example, he says that customers can start investing from approximately $2,000 at an annual fee of 0.88%.

In fact, robo-advisers are gaining popularity among beginners and seasoned investors alike.

“Robo-advisory investing has become the buzzword for a new channel of investing for both existing investors and newbies, particularly in our digital world,” says Lorna Tan, head of financial planning literacy at DBS Bank.

The team behind Phillip Smart Portfolio – Phillip Securities’ online digital investment service –says robo-advisory services provide clients with “a fuss-free way to start investing and own a portfolio, as the investing decisions are left to the experts”. A robo-adviser reduces the time needed for a new account to be opened as paperwork is reduced, the team adds.

Similarly, OCBC’s Goh, and independent robo-adviser Stashaway’s CEO and co-founder Michele Ferrario feel that robo-advisers are chosen for their simplicity, and low-entry-level investment rates.

Goh and Ferrario agree that these services are used by new investors and veteran investors alike.

Goh says that these investors are looking for quick investment solutions, and “may want a simpler, more guided and personalised investment experience”.

Ferrario says: “People who are starting out appreciate the simplicity, flexibility and the low minimum investments, while investors with more experience use robo-advisers to get access to professional asset allocation at a very low fee.”

Samuel Rhee, chairman and chief investment officer at independent robo-adviser Endowus, believes that there is an increasing awareness of access to lower-cost options that traditional financial institutions and advisers do not offer, as well as an increasing desire for convenience and a digital experience as more people have the desire to take financial responsibility into their own hands.

Endowus is a digital platform that lets investors invest their CPF and Supplementary Retirement Scheme (SRS) money, and cash, through a dedicated management team in one place, he says.

What exactly is a robo-adviser?

A robo-adviser is a digital financial adviser that helps investors manage and allocate a percentage of their assets according to their risk assessment, and aims to generate the best potential returns for them.

A robo-adviser determines the best course of action for each investor through an automated algorithm program that is based on their risk profiles and financial needs. For a robo-adviser to understand what its investor wants, the investor’s risk profile is determined through a series of questions.

Why invest with a robo-adviser?

If you are completely new to the market and don’t know where to begin, a robo-adviser provides you with much-needed advice for a smaller management fee, as compared to a traditional financial adviser.

DBS’s Tan believes that robo-advisers help investors save time on research, and “take the guesswork out of stock picking”. She says: “You are assured that your funds are professionally managed.”

“For [investors] who are already in the market, [robo-advisers] are a way to supplement other investments as part of a long-term diversified strategy,” Tan adds.

OCBC’s Goh believes that robo-investment platforms are gaining popularity among investors as they “provide customers with a relatively easy way to get access to portfolios that are constantly monitored and rebalanced periodically”.

“Most investors will be able to get exposure to many sectors via the wide range of ETFs available in the market now,” says Goh. “Robo-investment platforms like ours add a different complexion to traditional investments as they provide a filter to ensure only the most appropriate underlying assets are used while optimising the portfolio mix to account for better risk-adjusted returns.”  

How do robo-advisers allocate their funds?

For Endowus and Phillip Smart Portfolio, fund allocation depends on the individual investor, and their risk profile. The former aims to invest long-term, which minimises all-in costs while offering its clients a risk-appropriate, globally-diversified portfolio so that they “have the best chance of succeeding in the long run”.

DBS’s head of financial planning and personal investing, Evy Wee, says the bank’s one-stop portfolio solution leverages the expertise of DBS’s team of wealth management strategists. It offers a portfolio of four to seven Singapore Exchange-listed exchange-traded funds (ETFs) that represent 200 to 13,000 holdings or assets under said ETFs.

DBS’s digiPortfolio lets investors choose from two portfolio options – the Asia Portfolio, which gives investors access to the Singapore, China, and India markets; and the Global Portfolio, with access to UK-listed ETFs, as well as the European, US, and Asian markets except for Japan.

Stashaway believes in allocating and diversifying the funds to different ETFs, including the iShares Core S&P 500 ETF, Vanguard FTSE Europe ETF, iShares MSCI All Country Asia ex-Japan, and SPDR Portfolio Emerging Markets. This is to gain exposure to its list of 38 asset classes, and to achieve a suitable risk level for each portfolio, says Stashaway’s Ferrario.

What to look for in a robo-adviser?

Beyond affordable fees, there are several things to look for in a robo-adviser.

Stashaway’s Ferrario believes a good robo-adviser needs to have a “strong web and mobile interface”, as well as a “solid investment strategy”. He adds that would-be investors should ask themselves if they trust the team behind the robo-adviser, and if the management team’s investing strategy is “sound”.

“The fees won’t make the difference in the long term, as they’re all quite comparable. It’s the investment strategy that will make the difference in the long term,” he says.

Endowus’ Rhee echoes his view. “The team [is important]. Who is behind the company? Can you trust them? I would make sure you know who is on the other end of your money,” he says.

In addition to a “convenient, transparent, and easy-to-use” product, as well as potentially hidden costs, Rhee believes an investor should explore the robo-adviser’s financial products. “Which [ones] can offer investment solutions for CPF, SRS and cash? Do any of them offer things I cannot get on my own? Are the options diversified in their holdings?” he says.

Advice matters to Rhee, too. You should “look for one that is strategic and passive in trying to reach your financial goals rather than tactical and active in trying to beat the market, which is proven to be very difficult to do”, he reckons.

And when it comes to money, safety and security are must-haves. Rhee asks investors to consider if their money and assets are held safely with the robo-adviser. “Endowus clients are given an account in their own name at UOB Kay Hian, Singapore's largest broker and a CPF Investment Administrator. Clients send money to UOB Kay Hian directly, and UOB Kay Hian processes transactions on the instructions of Endowus, so we never touch your money,” he says.

“Always understand how they maintain the safety of their clients’ assets. Some of the robo-advisers have the clients' assets pooled together, rather than being custodised in the clients' own legal name as with an established financial institution,” adds Rhee. “In the case that the robo-adviser ceases operations, the assets of the clients' may all be forced to liquidate, rather than letting the clients hold on to the investments.”

DBS’s Tan says that the four things a new investor should look out for in a robo-adviser are: one that is “easy to understand”, has a variety of portfolios for you to choose from, a good track record from its team of portfolio managers, and “affordable and transparent fees”.

The team behind Phillip Smart Portfolio agrees. Apart from looking out for hidden fees, the portfolio base currency – or the currency which the portfolio is valued – matters. “Portfolios that are not denominated in Singapore dollars may expose you to foreign exchange risks,” it says.

OCBC’s Goh recommends investors consider the “legitimacy and reputation of the financial institution offering the service”, beyond its annual management and transaction-related fees, and variety of investment products offered. “The minimum investment amount required, as well as flexibility and customisation of an individual’s risk preference in their portfolio” matter too, he says.

“The track record of a robo-investment platform is also an important consideration. Robo-investment portfolios may also have risk exposure to specific assets or markets like equities, bond markets or currencies. Investors should read up to understand the markets and assets their portfolios are exposed to,” Goh adds.

How much money should a beginner investor place with a robo-adviser?

This depends on how much the investor has put aside for investments, and the minimum amount of investing capital required per robo-adviser.

“For those who are new to investing or have dry powder, the current market uncertainty and sell down could present a great buying opportunity,” says DBS’s Tan.

But she cautions that “before you jump right in, ensure that the money you are putting into investment is cash that you don’t need in the short term and that you have your bases covered”.

Tan says: “This means you have set aside at least three to six months of emergency cash or more if you have dependants… and at least 12 months for those who are self-employed.” The money set aside should not include cash for healthcare needs and mortgage too, she adds.

The way Endowus’ Rhee sees it, the amount is up to the individual investor. “It depends on how much they are comfortable with,” he says.

“If you are investing a larger amount, and want to invest long-term and make a meaningful impact to your life, then you should take time to understand the different options, the security of the assets, the strategy of the platform, and the underlying risk of the investment products that you are investing in,” he adds.

For Stashaway’s Ferrario, while the amount is also up to the investor, he advises investors to “think long term and set up your most important financial goal”. Citing retirement as an example, he says, “it will take many years to accumulate enough wealth to be able to stop working and live comfortably using the money you have made, saved and invested over time”.

“The earlier you start, the easier it’ll be,” he says.

Phillip’s Smart Portfolio team believes that “$5,000 is the minimum investment amount” to start with for its own robo-adviser. “If the amount is too small, it might be difficult to maintain a meaningful portfolio”, it says.

Can investors still make their own investing decisions even if they have a robo-adviser?

Investors who want to retain some control over their investments with a robo-adviser should carefully consider their risk-levels when choosing one, as they will not able to pick and choose individual securities.

For instance, DBS’s digiPortfolio invites investors to choose from three risk levels that best suit their personal risk tolerance, financial situation, and investment goals, says DBS’ Wee.

Ferrario says: “Robo-advisers build portfolios for clients. When signing up for a robo-adviser, take the monthly investment plan approach seriously.”

“Some robo-advisers (like ours) will calculate how much you should save each month to reach a particular goal of yours. Have a monthly investment plan that you can stick to, which can prevent you from trying to time the market: correctly timing the market is considered nearly impossible (luck aside),” he says.

Ferrario adds: “Stick to the plan. Stay in the market. Robo-advisers offer flexibility in withdrawals and deposits, but that doesn’t mean you should use that to time the market.”

How to invest with a robo-adviser?

Most robo-advisers offer online application services, which you can simply sign up with. You may also need to have several documents for identification at the ready. Minimum sums may also apply for the respective robo-advisers.

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