This article was not reviewed by the Monetary Authority of Singapore (MAS) or any other relevant authorities.
Gone are the days where we had to dream of robots with such capabilities. The future is now… as a new technological advancement threatens brokerages.
What are Robo-Advisors?
Playing on the words robots and advisors, robo-advisors are digital platforms that provide automated, algorithmic financial services with minimal human supervision, if any.
By collecting information from the clients such as financial situation and future goals, these robo-advisors run them through a proprietary algorithm unique to the company, and offer unique portfolios based on the data collected.
Majority of the robo-advisors trade on Exchange-Traded Funds (ETFs). Each ETF comprises a basket of stocks across multiple companies, allowing you access to a diversified portfolio of global ETFs. You will be able to find their portfolio allocation details in their respective websites!
1. Passive Investment
These robo-advisors allow the investor a very passive form of investments. Simply key in the essential details like risk levels and investment horizon, and the robo-advisor will craft a personalised portfolio for them. Furthermore, as the investment nears the end of its horizon, the robo-advisors will rebalance them to focus more on wealth preservation instead of accumulation.
2. Lower Costs
By eliminating the human middleman, robo-advisors are able to reach the users directly. This allows the robo-advisors to charge a lower cost due to a lack of human labour. Traditional advisors typically charge 1% to 2% per year of Assets Under Management, while most robo-advisors charge a quarter of that, at 0.25% per year.
Contrasting with traditional advisors, robo-advisors are available round-the-clock, so long as the user has an internet connection. Efficiency is one of the robo-advisors’ strongest suits – a few simple clicks and you will be able to execute the trade that you planned for. Whereas for traditional advisors, you would still have to call them, or arrange a meeting to explain your needs, before filling out the necessary forms and waiting for these forms to be processed.
4. Entry-Level Investors
The futuristic advisors require minimal amounts to get started, from as low as $1. Comparing this to traditional advisors which generally require $5,000 as a baseline, robo-advisors are more suitable for beginner investors who do not have much capital. Robo-advisors target a wider market, aiming to earn a small percentage from each of their consumers, aggregating to a huge amount, and audience as well.
1. Lack of Flexibility
When using a robo-advisor, chances are that your portfolio is not completely personalised to you, and you only. They tend to follow a portfolio based on risk levels and time horizons undertaken. However, if you want to buy or sell a specific asset in your portfolio due to whatever reasons, most robo-advisors do not allow this option, limiting flexibility in your portfolio.
All in all, a robo-advisor is more suited for entry-level investors who either do not have a huge capital to invest, or do not know what assets to pour their money in. They might also be suitable for investors who are looking for a more passive strategy when it comes to investing.
But, it’s still important to know what you are signing up for, and understand if there are any underlying fees that might be hidden. Start small, and definitely don’t dive 100% into it if this is your first time!