Last updated on December 3rd, 2018 at 05:29 pm
Have you seen some robo advisors or robo investing adverts?
If you have OCBC or UOB ibanking, you may have seen it being offered when you log in.
There is hype about robo advisors and banks are rushing to offer you a product.
But what really benefits you?
To start things off, are robo advisors regulated in Singapore?
MAS classifies robo advisors as fund managers in accordance with the Securities and Futures Act and they are allowed to serve clients like you and me so long as they meet certain requirements.
These include the following:
- Offer a diversified portfolios composed of non-complex assets
- People who have relevant experience managing funds and technology filling some of their key management roles. (Hence if you check their investment team, its for sure with someone with experience. Don’t get overly impressed).
- Audited by an independent auditor within a year of their commencement of business.
Even though they do not need to be licenced with MAS, i think they should be pretty sound.
Definitely not like in cryptocurrencies.
Robo advisors offer you a low fee structure and they excel at managing the investment allocations.
This is the list of robo advisors in alphabetical order
– CGSCIMB eWealth
– Ocbc Roboinvest
– UOB Utrade Robo
They offer you investment with lower fees in comparison to traditional advisers.
At current moment, 0.5%p.a from Autowealth is possibly the cheapest if you are looking at small investment amounts. OCBC Roboinvest may be the most expensive.
In addition, robo advisers have an “in-house investment theory” to manage investment allocations that is frequently based on Quant strategy.
THE KEY: QUANT STRATEGIES
What is Quant strategy?
In simple terms, Quant Strategy is using mathematical models to predict investment opportunities.
These models themselves factor in P/E ratios, growth potential, expense ratios, liquidity or just about any factor deemed important by the quant investment strategist.
An algorithm is created to select ETFs for the portfolio.
Something that feels very distant to traditional “Warren Buffett” art of analysis.
It seems most robo advisor invests into US
Various quant strategies seem to pull up US equities to be highly rated based on their allocations.
Stashaway’s portfolio shows 50% US equities allocation for an aggressive portfolio.
CGSCIMB eWealth balanced portfolio has 25% into US Equity (iShares Core S&P, Invesco QQQ and Vanguard total stock market)
In addition, there is usually some allocation to gold.
Maybe the diversification factor in Quant strategies brought in its use.
For this portfolio by Smartly, US Municipal Bonds MUB which is also a US asset class is used at a 35% allocation.
Pretty large for an asset class that not many are familiar.
In my simplistic investment style, I prefer ideas that I know well.
In summary, different robo advisors use different ETFs but US allocations frequently seem high.
Some robo advisors offer “theme-based” robo investment portfolios
This concept of “theme-based” investing has been gaining in popularity over the years.
Instead of investing into ETFs, individual stocks are selected by Quant strategies.
Below are two “theme-based” portfolio used to buy Food brands listed in the USA.
It’s abit small but these 2 portfolios from 2 different platforms are identical!
Starbucks, PepsiCO, McDonald’s etc holding is 7.58% each!
Do you know that there is a tax on dividends from US listed ETFs?
Most roboinvestment portfolios buy ETFs listed in the US and your dividends are subject to a 30% dividend withholding tax.
If dividends are 3% that means an additional 0.9% fees.
UOB Utrade may buy some of its ETFs listed elsewhere which has a different tax system like in London.
Is an automated investing recommendation too simplistic?
It starts with a short survey to ask you about your investment objectives, time frame, investment experience etc…
It is a necessary process that I do also with my private clients.
Below is a snapshot from 2 different platforms and the journey is pretty similar.
The system then plugs your answers into an algorithm that determines the kind of portfolio and asset allocation that is appropriate for your age, time horizon and risk tolerance.
Sounds good but what does it mean?
This is where you may face the risk of “you don’t know what you don’t know”.
Especially if you are a new/starting investor.
This is an example.
A new investor may select, I will not sell when the market comes down by 20%.
That’s expected. Even on paper, it’s silly to admit losses on your investments.
The imaginary losses do not even feel painful.
But what actually happens when markets come down by 20% or 50%??
Bad news is everywhere.
Economist and respected market analyst suggest more bad news to come.
Having the fortune or misfortune to ride through the 2008 financial crisis with clients, I recall vividly how tough it is to remain invested when prices were sliding down every week.
There were certainly many who gave up on their investments and took 50% losses!
Why? It was just to avoid further losses.
This is the same reason why paper trading does not work.
Because handling actual pain and imaginary pain are 2 different things altogether.
I firmly believe that experience will be priceless to you in your investment journey.
The best ways are to make a dedicated approach to learning investments if you have the time or to hire an experienced professional.
Successful long term investment is about
1) Having the right mindset
2) Doing the right strategies
3) Having the right patience.
4) Changing the investment approach to suit your ongoing needs
And these principles are on the opposite side of a “convenient purchase”.
It is not about finding the simplest way to buy or the lowest fees.
To get started in your investment journey, click below now.