Frederick Jace
A Robo-advisor is a computer program designed to automatically invest money per an investment strategy. The term “Robo-advisor” was coined by US venture capital investor Andreessen Horowitz in its announcement of the formation of a $100M investment vehicle for technology startups focused on financial services. Since then, Robo-advisor technology has been adapted for digital wealth management in many countries including Singapore.
Robo-advisors use artificial intelligence and big data analytics or an algorithm to build a diversified portfolio across multiple asset classes with low fees. The Robo-advisor then manages the investments in the account automatically, using computer algorithms based on rules that are customized for each client.
Robo-advisors first emerged in the US as online investment managers. In Singapore, Robo-advisors have been available as brokerages since 2007.
In Singapore, Bambu, a digital wealth management company is one that uses Robo-advisor to manage wealth for their clients. Robo-advisors are similar to so-called “discount brokers” in that they target mass affluent investors instead of high net worth individuals. In Singapore, they are also known as “online brokers” or discount brokerages.
Robo-advisors do not provide investment advice. Rather, they offer financial planning and portfolio management at a low cost, particularly in comparison to traditional advisors who charge asset-based fees (1% to 2% of assets typically). As Robo-advisors rely on computerized algorithms, they can be offered lower fees than traditional investment advisors who require more human intervention.
Robo-advisors rely on algorithms that use big data analytics and artificial intelligence to analyze an individual’s investment objectives and risk tolerance. Robo-advisor clients complete a questionnaire about themselves and their goals, typically online. Based on the information provided in the questionnaire, a risk profile is determined which dictates how the client’s portfolio will be invested.
Robo-advisors only offer the automated management of an investor’s entire portfolio but don’t provide other financial services such as checking and savings accounts, mortgages, credit cards etc. Some Robo-advisor companies also offer investors access to low-cost exchange-traded funds. Robo-advisors offer limited personalized financial planning and portfolio management.
Robo-advisor platforms deliver advice by way of text, charts and graphs. Most incorporate a tax optimization strategy that generates portfolios designed to reduce the amount of taxes paid when the assets are eventually sold. They also include pre-made, diversified portfolios with optimized asset allocation tailored to specific risk profiles.
Robo-advisors are typically available to investors globally and offer some features including online account opening, financial tracking tools, 24/7 customer service via e-mail or phone and automatic deposits into the account.
A Robo-advisor uses algorithms to build an investor’s portfolio based on their investment objectives and risk preferences. Robo-advisors use an investor’s profile to build a diversified portfolio of low-cost ETFs, index funds or similar products.
The Robo-advisor then manages the investments in the account automatically, using computer algorithms based on rules that are customized for each client. This allows investors to save time by implementing long term investment strategies that are typically complex.
Robo-advisors can use either a passive or actively managed approach to investing. Passive Robo-advisors utilize index funds and ETFs to match the market, so their returns should be similar to the ones of the overall market (i.e., they should have low management fees). Some platforms also allow investors to customize their portfolios. As with human advisors, there are two types of Robo-advisors: human-assisted and completely automated ones.
Human-assisted platforms use algorithms that build portfolios based on an investor’s risk profile but then a financial planner reviews the suggested investments and recommends any changes personally. This type of Robo-advisor is more expensive than the completely automated ones, but typically not as much as human financial advisors.
Completely automated Robo-advisors are entirely computerized and designed to offer broad portfolios with diversified assets based on an investor’s risk profile and investment objectives. Their services cost significantly less than financial advisors and they can be easily accessed online wherever a computer is available.
Robo-advisors are typically available to anyone aged 18 or older, regardless of their financial assets. However, human-assisted platforms require accreditation in the form of professional qualifications or group membership. Robo-advisors typically do not require accreditation, although some human-assisted platforms might do.
