Should you consider using Robo-advisor for your investments?

Today I want to talk about the topic of Robo-advisors – more so I want to demystify the marketing around Robo-advisory and look at their effectiveness as an instrument and a potential solution.

To understand whether you should or should not consider using a Robo-advisor for your investment needs, you have to first understand what you are hoping to get from using a Robo-advisor.

Reasons to invest in a Robo-Advisor

The 3 most common reasons as to why people would invest in a Robo-advisor is

1. they don’t have the time nor knowledge to manage their investments

2. their fees are low when compared to engaging a normal human advisor

3. they want to diversify into multiple funds with a small amount of investment capital

So let's explore each reason one by one and see how effective Robo-advisors truly are in achieving the needs of an investor.

1. No Time No Knowledge

Now when it comes to investing, there are only three questions you need to address:

1. what to invest in?

2. how much you should invest?

3. when should you buy and when should you sell?

When it comes to Robo-advisors, they only help you answer one out of three questions and that is what you should invest in.

Robo-advisors are in the business of fund management – they are here to tell you what you should invest in but they are not in the business of advising you how much you should invest or when you should buy or sell based on your unique circumstances and financial plan.

If you were to ask a Robo-advisor how much you should invest and when you should sell, the answer will always be as much as you can for as long as possible but is that really what you should be doing?

At the end of the day, you still need to have the time and knowledge to answer the second and third questions of which if that is the case, why not just do it yourself?

Why pay someone else a fee to do 1/3 of the job?

What’s stopping you from copy and pasting their asset allocation and doing it on your own without paying the fee itself.

Long story short, if you don’t have the time or knowledge to manage your investment, you should decide to either learn to do it yourself or find someone else who can do it for you completely and not rely on a solution that is not complete.

2. Lower Fees

While it is undeniable that Robo fees are lower than a human advisor, do you truly understand what are you paying for?

Riding on to the earlier point, Robo-advisors fee should be lower as compared to engaging a normal human advisor considering that they are doing 1/3 of what a human advisor is required to do.

When you engage a Robo-advisor, you are essentially engaging a fund manager.

When you engage a human advisor, you are getting more than just a fund manager.

You are getting a personal financial advisor that will tailor a plan for you and provide personal guidance to ensure that you progress in the right direction. That is what you are paying for.

So let me ask you this question again, what are you paying for and is it really worth it even though is cheap?

I can't speak for all advisors but when my clients engage me to be their financial planner, I become their gatekeeper that handles, protects, and grow their assets more than just serving the function of a fund manager.

When they engage me to be their financial planner, they outsource a good chunk of the day-to-day management to me so that they can free up the time to focus on their career and their family.

They can do what they enjoy doing while knowing fully that someone is taking care of their financial progression that is beyond just investments alone.

Naturally, when I’m doing so much more, I will want to charge a higher fee to justify the value created as compared to a Robo-advisor.

And like I said, if your main consideration is fees, you should do it yourself. what’s stopping you from copy and pasting their asset allocation and doing it on your own without paying the fee itself.

3. Diversification

When it comes to diversification into other funds, no fund-of-funds does it cheaper and better as compared to a Roboadvisor.

Most fund-of-funds available in the market today are too rigid in their asset allocation and they charge too much for their “services”

In this area, I would argue that Robo-advisors are the best instrument to use as compared to its fund-of-funds peers as they are flexible in your achieving your desired asset allocation and the cost that they charge is a fraction of what others are charging.

Long Story Short

If we remove the marketing aspect of Robo-advisors, you will realize that they are just a fund-of-funds manager. And in the area of fund of funds, they are arguably the best in terms of flexibility and cost.

That said, if you are someone who knows what you are doing and are looking to tap into a fund of funds, you should consider using a Roboadvisor that adopts a strategy that you are looking for.

If you are someone who does not have the knowledge or time to manage your investment, Robo-advisors are not a suitable instrument as they only solve 1/3 of what an investor needs to solve.

You are better of picking the art and skill of investing on your own or engaging an advisor to manage it on your behalf than paying for a half-complete solution.

Need Help?

If you would like to find out how you can benefit from engaging an Independent FA and Certified Financial Planner, do reach out to me and we can set up an introductory zoom session.

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I blog regularly on financial planning topics that could help address some of the more common concerns that you may have when it comes to achieving financial stability and freedom here in Singapore!

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Disclaimer:

• This article is meant to be the opinion of the author

• This article is for information purposes only

• This article should not be seen as financial advice

• This advertisement has not been reviewed by the Monetary Authority of Singapore