Disruption has infiltrated into every aspect of our lives, from e-commerce to the transport industry. Now, the financial sector is facing a new wave of disruptors that represents another ‘bread and butter’ income for the bank: Wealth management.
In the past two years, fintech startups that provide robo-advisory have been proliferating. Nowadays, whenever any startup brands their service/platform with “AI”, the news coverage on them increases exponentially. Startups like StashAway, Autowealth, Smartfolios, Smartly and a bunch of other robo-advisory startups have started to attract the attention of retail investors. They are pulling away from traditional wealth management segment of banks.
So, what are robo-advisors?
Robo-advisors are your new-age fund managers. Instead of having your fund managers take care of your investment capital, robo-advisors take care of them for you. Built on some of the “latest and sophisticated” artificial intelligence, these robo-advisors aim to do a much better job than your fund managers.
Why would you consider robo-advisors over your fund managers?
The natural question that surfaces to our mind is, “Real or not? Are you sure the robot can do a better job than humans?” Apart from all the hype that surrounds robo-advisors, there might actually be fundamental reasons why you should consider them.
1. Robo-advisors are emotionless, which is good in investing
One of the biggest reason for failure in investing is emotions. It is natural for humans to feel emotions and act on impulse. However, this is often a source of failure while investing. Fund managers are humans too. No matter how experienced they are, they might still be affected by emotions.
But robo-advisors are different. Robo-advisors are governed by a set of algorithms. These algorithms don’t feel any emotions, i.e. happiness or sadness. Moreover, they won’t feel tired at all. They can trade throughout the day, even at wee hours in the morning while most fund managers are asleep.
2. Robo-advisors cost much less than your fund managers
Since robo advisors are essentially a set of algorithms, they do not require high maintenance. This eventually translates to lower cost of investing for you as an investor. Robo-advisors typically charge 0.2-1% of the total amount that they manage. This is 25-90% lower than the fees that most fund managers typically charge investors.
3. Robo-advisors can tailor your portfolio, just for you
Not everyone gets the privilege to get a personal financial advisor to take care of your wealth for you. Your financial advisor probably takes care of 100 other customers and is too busy to give you a personalised service.
Unlike these financial advisors, robo-advisors can cater to your needs. Robo-advisors take your current life stage, investment objectives, assets and liabilities into consideration when deciding your portfolio allocation.
Is robo-advisory meant for you?
So, who are the ones that should consider robo-advisory services? There are two profiles that we feel are best suited to pursue the service of robo-advisors.
Millennials are the group of people that have only a few years of working experience. This also means that you have limited ‘firepower’ in our investment war chest. As such, you want to look for the best value for money service.
Thus, either you look for a fund that is able to make good returns for you, or search for a something that balances returns with low cost. Robo-advisory does that for you, i.e. balancing returns with low cost to help you better financially wealthier.
2. Working Adults
The other group of people who should seriously consider robo-advisors are the working adults. Instead of parking your money with your preferred fund or buying an investment-linked policy from your financial advisor, park them with a robo-advisor. You will find the robo-advisor gives you much more value for your money.
Moreover, as part of the working class, you don’t have much time to monitor your investments. You might also have limited time to monitor your finances to pump into investments whenever you have additional cash. Robo-advisors take the administrative trouble out of your sight by making every part of your investing automated.
What about the rest?
Truth be told, robo-advisory is suitable for everyone, regardless of your age, race or religion. After all, it is part of the wave of disruption that the wealth management industry is facing.
How to get started with robo-advisory?
Getting started with robo-advisory is as simple as ABC. You can start off by simply visiting StashAway, Smartly, Smartfolios or Autowealth and sign up with them. They will collect some financial information from you to recommend investments that are suited for your profile. Once that is done, just set up payment and instructions and you are on your way towards financial freedom! Simple!
If you’re new to investing, you may also want to find out more about index investing, starting with our introduction to the Straits Times Index (STI).