Robo-advisors: A snapshot

Investing

Robo-advisors: A snapshot

Robo-advisory is a growing business and has the potential to mobilise more retail investors. We recap what they do and showcase several options investors in Singapore can choose from.

Published on 8 June 2018

Robo-advisors have gained in popularity since they first launched a decade ago, with more platforms and Fintech companies arriving on the scene to take a slice of the pie away from traditional wealth managers.

In general terms, the robo-advisory model offers investors automated investment strategies that factor in one’s risk tolerance and time horizon. Algorithm-driven processes then invest and manage your portfolio.

As the involvement of expensive human financial advisors and portfolio managers is reduced, costs can be a fraction of the amount charged by traditional wealth managers. Betterment, a top robo-advisor based in the U.S. that has US$11 billion in assets under management (AUM), says that its investment model can increase returns by 2.66% a year.

Another major advantage of robo-advisors is a lower minimum investment requirement. Investors can make a start with as little as a few thousand dollars. This has provided younger, tech savvy retail clients with access to wealth management services traditionally reserved for the more affluent.

Are robo-advisory services here to stay?

Robo-advisors, AI, Artificial Intellegence

A recent report by Deloitte predicts that this segment of the wealth management industry will see exponential growth. The audit and consulting firm estimates that robo-advisors will manage between US$2.2 trillion and US$3.7 trillion by 2020. In another five years, this figure will grow to US$16 trillion.

Do robo-advisors lack the human element?

Perhaps, especially in cases where a client’s financial situation is complex and more comprehensive financial planning is required.

Some investors may still prefer the option of discussing their investments with a person. In fact, that’s a feature that has recently been introduced by Scalable Capital, a European robo-advisory company backed by BlackRock. Investors can discuss their financial matters over the phone or face-to-face with an advisor. The firm charges a one-time fee of £200 for this privilege. Scalable’s founder Simon Miller says, “It gives customers a level of comfort.”

Robo-advisory in Singapore

Robo-advisors, AI, Artificial Intellegence

The robo-advisory space in Singapore is developing but is still relatively in its infant stage compared to the US or Europe, cropping up in the market only in the last 3 years. Here’s a quick look at what some of these firms have to offer.

AutoWealth

Investors who want to focus on conserving their capital will find AutoWealth to be a good option. The company’s “AutoWealth Balanced Portfolio” outperformed all 13 global balanced unit trusts available in Singapore by providing a return of 12.8% over the 23-month period up to March 2018. The firm began operations in May 2016.

AutoWealth levies US$18 as “platform fees” in addition to an annual charge of 0.5% of the assets under management (AUM). Investors can start an account with a sum of S$3,000.

Initially, the firm required investors to start with a minimum balance of S$30,000. But in an effort to boost its customer base, AutoWealth has reduced this sum to one-tenth of the original amount. Investors also have the flexibility to close their account and withdraw their capital without incurring any penalties.

Smartly

Smartly, another Singapore-based robo-advisor, has opted for a graded fee structure:

  • Accounts under S$10,000 pay 1% per year.
  • Accounts over S$10,000 pay 0.7%.
  • The fee is reduced to 0.5% if your investment exceeds S$100,000.

The minimum investment amount is S$50. Investments are channelled into low-cost exchange-traded funds (ETFs). Investors get exposure to a diversified portfolio that is regularly rebalanced to reflect the original asset allocation.

Smartly invests in U.S. ETFs. Consequently, any capital that is deployed through them has to be converted into U.S. dollars.

How does the robo-advisor determine which ETFs to purchase on your behalf? Investors are required to answer a series of questions based on which they are scored on a scale of 1 (very conservative) to 10 (very aggressive). Your investments are selected using this information.

If your answers result in a risk score that you don’t like, you can change it manually. This will result in your investment portfolio being modified to reflect the new risk category.

StashAway

StashAway invests your money in one of 28 portfolios designed to address different levels of risk appetite. How much can you expect to earn? The company says that it targets an average net return of between 3.8% and 9% over the medium- to long-term. The rate varies with the investor’s risk profile.

There is no minimum balance requirement and fees range from to 0.2% to 0.8% per year. However, to be entitled to the lowest fee level, you have to invest at least S$1 million. You will also bear transaction costs associated with the ETFs in which your money is invested, which range from 0.15% to 0.25%.

Freddy Lim, one of the co-founders of StashAway has worked at Lehman Brothers, Morgan Stanley, Citi, and Nomura. Describing the investment process deployed by the company, Lim says, “We’ve designed an online questionnaire which defines customers’ investment goals… and our algorithm then uses this as a basis to formulate investment parameters such as risk tolerance.”

“The technology provides retail investors with sophisticated investment techniques usually only available to institutional investors.”

Connect by Crossbridge

Robo-advisors, AI, Artificial Intellegence

This robo-advisor caters exclusively to accredited investors. To be eligible to open an account you are required to have personal net assets in excess of S$2 million or an income of not less than S$300,000 in the last 12 months.

Despite the eligibility criteria, the minimum investment amount is low at only US$1,500. Fees range from 0.2% to 1.25%.

What are the returns that Connect provides? Here is how the various portfolios offered by the firm performed in 2017:

Robo-advisors, AI, Artificial Intellegence

Crossbridge, an established global wealth management firm with an AUM of over US$3 billion, has been very successful with its Connect platform. The robo-advisory arm already has US$200 million in assets under management.

In a recent move, Crossbridge has introduced Connect Prime, which requires investors to put up at least S$500,000. What is the advantage that Connect Prime offers? Clients have access to the digital platform as well as to a human wealth manager. The enhanced service is available at a fee of 0.75% of AUM.

The bottom line

Robo-advisory services are gaining wider acceptance in Singapore. The low minimum investment required has provided retail investors with access to the wealth management techniques traditionally only available to a more affluent clientele.

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