Robo-Advisers: Investment Advisers' Future Or Fad?

Robo-advisers are digital platforms that provide automated, algorithm-driven financial planning and investment services with little to no human supervision. They are considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience at a lower cost than traditional human advice.

Robo-advisers collect information about a client's financial situation, goals, and risk tolerance through an online survey, and then use the data to offer advice and automatically invest for the client. They are best suited for traditional investing and are not the best option for more complex issues, such as estate planning.

Robo-advisers are most common in the United States but are also present in Germany, Australia, India, Canada, and Singapore.

How do robo-advisers work?

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning and investment services with little to no human supervision. They are investment managers that use computer programs to professionally invest your money.

Robo-advisors work by gathering information about a client's financial situation and future goals through an online survey. They then use the data to offer advice and automatically invest for the client. The "robo" in robo-advisor refers to the automated features that are central to this type of investing platform.

Robo-advisors use Modern Portfolio Theory to design their portfolios. This theory aims to optimise portfolios for returns while minimising risk through diversification. By investing in a wide range of asset types, Modern Portfolio Theory increases the odds that when some investments are down, others will be up, keeping the portfolio trending steadily upward, even during volatile times.

Robo-advisors also provide automatic rebalancing, which means they adjust the percentage of investment types based on market performance to keep them in line with the client's financial goals. This is done to ensure that the optimal asset-class weightings are maintained, even after market moves.

Robo-advisors are often inexpensive and require low opening balances, making them available to retail investors. They are best suited for traditional investing and are not the best option for more complex issues, such as estate planning.

What are the pros and cons of robo-advisers?

Robo-advisers are digital investment platforms that use algorithms to automate and manage your investment portfolio. They are best suited for traditional investing and are not the best option for more complex issues, such as estate planning.

Pros

• Lower fees: Robo-advisers are less expensive than working with a professional financial adviser, with most charging a fee of around 0.25% to 0.50% of your assets under management (AUM) per year.
• Easy to start: Robo-advisers often have low or no minimum account requirements, making them accessible to investors with a small net worth.
• Hands-off management: Robo-advisers automatically manage and rebalance your portfolio based on your goals and risk tolerance.
• Tax-loss harvesting: Some robo-advisers offer tax-loss harvesting, which can help increase overall returns and lower your tax bill.
• Instant diversification: Robo-advisers diversify your portfolio through index funds and exchange-traded funds (ETFs), reducing the risk of significant losses.
• Save time: Robo-advisers manage your investments for you, saving you time and effort.
• Easy to use: Most robo-advisers have simple interfaces and apps that allow you to easily view your investments and add funds.

Cons

• Limited personalisation: Robo-advisers may not be able to provide tailored advice that considers your specific financial situation and goals.
• Limited human interaction: While robo-advisers offer customer service, access to human advisers may be limited or come at an additional cost.
• Narrow investment choices: Robo-advisers typically invest in a limited range of ETFs and may not offer the same breadth of investment options as a traditional adviser.
• Not suitable for complex situations: Robo-advisers may not be equipped to handle complex financial situations, such as estate planning, complicated tax management, or trust fund administration.
• May be more costly than doing it yourself: Despite the low fees, you may end up paying more in fees in the long run.
• May lack empathy and sophistication: Robo-advisers have been criticised for lacking the empathy and sophistication of human advisers.
• May not consider all your investments: Robo-advisers may not have a complete picture of your financial situation and other investments.
• Not suitable for everyone: Depending on your investment strategy, risk tolerance, and financial goals, a robo-adviser may not be the right fit for you.

How much do robo-advisers cost?

Robo-advisers are digital investment platforms that provide automated, algorithm-driven financial planning and investment services with little to no human supervision. They are best suited for traditional investing and are often inexpensive, requiring low opening balances.

Robo-advisers generally charge annual management fees of 0.25% to 0.50% of assets under management (AUM). Traditional financial advisors typically charge around 1% of AUM per year. On an investment balance of $100,000, a 0.25% robo-advisor fee would amount to $250 a year, while a 1% fee would equal $1,000 a year.

Some robo-advisers charge a fixed monthly subscription fee instead of an annual management fee. For example, Syfe in Singapore charges an annual management fee of 0.65% per annum for investments up to S$50,000, while SqSave charges 0.5% per annum with no minimum investment amount required.

Robo-advisers are also known for their "all-in" fees, which include additional costs depending on the products the robo-adviser invests in. For example, if a robo-adviser invests in ETFs, there might be a minor (0.1% or less) ETF fee included in the overall fee.

It's important to note that while robo-advisers charge lower fees than traditional financial advisors, these fees can still add up over time and eat into long-term gains. Therefore, investors should carefully consider whether the value provided by robo-advisers is worth the cost.

How do robo-advisers compare to traditional financial advisors?

Robo-advisors and traditional financial advisors differ in several key ways. Here is a comparison of the two:

Fees and Accessibility

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning and investment services with minimal human supervision. They are often inexpensive and require low opening balances, making them accessible to retail investors. In contrast, traditional financial advisors often charge higher fees, typically around 1% of assets under management, which can be a significant expense for investors.

Personalisation and Complexity

Traditional financial advisors can offer a higher level of personalisation and can adapt to an individual's changing needs. They can take into account a client's entire financial picture, including budgeting, investments, retirement planning, tax strategies, and estate planning. Robo-advisors, on the other hand, may not be suitable for those with complex financial needs as they lack the ability to understand nuanced personal circumstances.

Emotional Decision-Making

Robo-advisors use algorithms to make investment decisions, removing emotional decision-making from the process. Humans often follow their instincts and emotions when investing, which can sometimes lead to poor choices. Robo-advisors also remove the potential for human fallibility and bias, which can affect the advice given by traditional financial advisors.

Suitability for Different Investors

Traditional financial advisors are often sought by older, wealthier, or technology-averse individuals who value the personal connection and comprehensive financial advice offered. In contrast, robo-advisors are particularly attractive to younger, tech-forward individuals who are comfortable with technology and appreciate the hands-off approach and low fees.

Hybrid Models

Recognising the strengths and weaknesses of both options, many financial services companies now offer a hybrid approach. This combines the accessibility and efficiency of robo-advisors with the personalised touch and expert judgment of human advisors. This model provides a flexible and comprehensive service, allowing investors to benefit from both automated investment management and personalised advice.

How do I choose the best robo-adviser?

When choosing a robo-advisor, it's important to consider your financial goals, the features that matter to you, and how much you are willing to invest. Here are some factors to help you choose the best robo-advisor for your needs:

• Fees: Robo-advisors typically charge lower fees than traditional financial advisors, but the cost can vary among different providers. Some robo-advisors charge a fixed monthly subscription fee, while others charge a percentage of your assets under management (AUM). It's essential to calculate and compare the fees to ensure you're getting a fair deal.
• Investment portfolios: Most robo-advisors use low-cost index funds and exchange-traded funds (ETFs). However, the specific investment options and level of customization can vary across providers. Consider whether you want a pre-built portfolio or the ability to customise your investments.
• Account types: Robo-advisors usually offer both taxable accounts and tax-advantaged accounts like IRAs. If you need a more specialised account, such as an inherited IRA or 529 plan, your options may be more limited.
• Access to human advisors: Some robo-advisors provide access to human financial advisors, either through dedicated advisors or email/chat support. If you feel you need more personalised advice and guidance, look for a robo-advisor that offers this feature.
• Usability: Consider how user-friendly the robo-advisor's platform is. An intuitive and seamless platform can make managing your investments easier.
• Performance and portfolio management: While most robo-advisors aim to match market returns, the specific investment strategies and performance can vary. Look for features like tax-loss harvesting, automatic rebalancing, and goal-based investing tools to enhance your investment experience.
• Cash management: Some robo-advisors offer high-yield cash accounts and other banking services. If you're interested in these features, compare the interest rates and account amenities offered by different providers.

Frequently asked questions