In this post, I will be giving my personal opinions on the robo-advisor industry in Singapore and why I don't recommend most of the robo-advisors for long-term investors.
What is a robo-advisor?
Robo-advisor, to put it simply, is a digital platform that provide you an investment portfolio that is automated (requires no human supervision) and use advanced algorithms (patterns) to adjust your holdings in that portfolio. The investment portfolio is created by asking a series of questions in regards to your financial positions and how high is your risk tolerance.
In 2016, Stashaway - the first licensed wealth management company - that managed to introduce Singaporeans to the concept of robo-advisor. Soon, many companies, ranging from startups to existing financial conglomerates, started to join in the bandwagon to offer retail investors wide range of robo-advisor products that invest in various asset classes and boast its unique algorithms.
Currently, the popularity of robo-advisors have increased significantly among Singaporeans and even a number of my NSFs colleagues have plans to use robo-advisors till they retire. At this point, if I were in the conversation, I would have advised them not to do so.
Why are robo-advisors not recommended for long-term investors?
One of the biggest point that is stuck to my head is the fees incurred by using these roboadvisors.
Although most of the fees as shown here are quite low in relative to other brokerages such DBS-Invest saver of 0.85%, we have to take note that these fees apply to your total investments value instead of per transaction value which I feel will be an issue in the long run.
Why is this an issue?
To put it in a Singaporean analogy, imagine you are buying a plate of chicken rice (asset) at a hawker store and it costs $3 (platform fees) . You pay the $3 and you get the chicken rice. The next day, you decide to buy another plate of chicken rice, obviously it should only cost $3 but the owner charged $6 instead. Why? Cause the owner charged you $3 for this plate and another $3 for the plate you ate yesterday. Now you can argue with the store owner that this is completely ridiculous but this is how the robo-advisors are charging their usage of platforms.
This bar graph is comparing 2 funds and their fees over the span of 30 years. We are going to assume that both funds are contributed at a rate of $100 per month and have the same annualized returns of 10%. (Can't really compare long-term annualized returns since robo-advisor only debut in 2016)
Fund 1 (Your fund) :
Management fees: 0.5% p.a of total investment value
Contribution fees: 0%
Fund 2 (Alternative fund) :
Management fees: 0%
Contribution fees: 1.5% per transacted value = 1% commission + 0.5% FX conversion fee
As you can see, the management fee on total investment value alone has eaten up almost $18,000 more as compared to a transaction fee per transaction value. Even let say we add on re-balancing fees onto the alternative fund and re-balance 2 times every year, it will only amount to a maximum $3,000 for 30 years (a highly rounded up figure of course) which leaves around $15,000. (Do note I did not include FX conversion fees in robo-advisor fund so that's a plus for them.) Hence, although the fees may be low in the short-term, in the long term these kind of fees can eat up a good chunk of your return.
Of course, since robo-advisor only came around in 2016, it will quite harsh for me to just say because of fees alone to avoid robo-advisors completely. Who knows maybe it will be able to outperform other index funds such as IWDA and VWRA consistently over the long-term and justify the stacking of fees. However, as being a result-orientated individual unless I am able to see the evidences of over performance, I will have to be conservative and assume that robo-advisors perform only on par with other index funds out there. As of now, I will continue to keep track on the returns from the robo-advisors and will create another post to update you guys if there's new data.
Lastly, I welcome anyone to leave comments below whether this is really a big issue (It is to me), have a discussion in regards to robo-advisors or even critic about my stance. I will answer them as soon as possible.
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