Are Robo-advisors worth it?

You probably came across someone telling you “Hey, you should start investing!” But you have no idea how to start. Google maybe your best friend, but sometimes we get overwhelmed by the sheer amount of info on the web. It sometimes feels like you are stepping into a minefield. I get it.

However, Robo-advisors how are one of the easiest ways to get your feet wet into investing. They are digital investment apps designed to be easily accessible and user-friendly. Most important of all, it is easy to use for the average citizen like you and me who know nuts about investing.

Despite its name, it is neither a robot nor a full-fledged advisor…strange, isn’t it?

Opinions of Robo-advisors diff across the board, some thinks the platforms are fishy and choose to keep their cash in bank accounts for the meagre interest rates or worse… Milo tin cans. Others advocate for DIY investing instead, stating the costs of DIY are much lesser than Robo-advisor’s fees. But after all the commission fees, is it lesser though?

What are the pros of robo-advisors?

Low cost: Most Robo-advisors platforms charge management fees of up to 1%, much lesser than your traditional ILPs or “Financial Advisors” of around 2.5% or more. Lower fees allow you to invest more money, which means more gains in the long run!

Ease of use: Many Robo-advisors are designed to attract newer investors due to their appealing process. Just sign up, throw your money in the app and let time do its work. Such apps or web versions have a simple, easy to read user interface that allows the investor to monitor their portfolio returns. No more complicated trading charts.

Diversified portfolio: Robo-advisors allows you to invest in many asset classes such as ETFs, Mutual funds or unit trust such as Dimensional Equity Funds. Their portfolios are usually diversified into different sectors, with a mix of equities and bonds. This reduces the risk as all your eggs are in different baskets instead of one.

No Lock-in period nor withdrawal fee: Robo-advisors wins in this category versus traditional brokers as there is no withdrawal penalty nor lock-in period, allowing investors to deposit and withdraw their cash without fear of a ten-year lock-up period unlike *coughs* ILP

Low minimum investments: You do not need much to get started! Most Robo-advisors does not require a minimum sum to get your feet wet, so you can start with little amounts like $50 to test it out. An exception is Endowus, DBS Digiportfolio and OCBC RoboInvest.

What are the cons of robo-advisors?

Expensive in the long run: the average management fees for Robo-advisors are around 0.6-0.7%, which may not seem like a lot. But it adds up, in the long run, to become more expensive than doing your own DIY, especially if your investment amounts are a lot. Take, for example, DBS Digiportfolio rate of 0.75. If you invest 100k with them, you will be paying them $750 effectively every year! Can buy me a few months’ worths of Chicken Rice already. Hence, it is generally recommended to avoid Robo-advisors for large sums of money if you can help it.

Reliant on algorithms

Different Robos have their own unique algorithms such as StashAway’s ERAA (Economic Regime-based Asset Allocation). Such algorithms are rather inflexible to market changes sometimes, and they may not necessarily be better than passive investing. Moreover, you have zero control over their strategy. Their strategy may not be everyone’s cup of tea, an example being Stashaway heavy gold allocation that has been drawing a lot of flak from the community.

Who is it for?

You don’t know how to invest in stocks or simply don’t have the time

Robo-advisors are popular because they are easy to invest in without much effort. You can even set up a standing instruction every month and not look at it for another year or two. Thus, little to no investing knowledge nor research time is required.

You want a cheap and easy way to start your investing journey

Robo-advisors do not charge a deposit nor withdrawal fees, you can throw in any amount of money anytime you want. A dollar a day? No problem! No additional fees are charged as management fees are based on the annual total sum of amounts. Unlike brokerages that charge a commission fee every time you buy a stock of any amount. These commission fees usually add up to a lot over time. Hence, some people prefer Robo-advisors to a cheap and easy way to dollar cost average (DCA).

You are lazy or want a passive investment system

“Let money work for you” is a true saying when it comes to Robo-advisors, you just have to transfer money in and let time do its work with almost zero effort. Time is precious, and you want to spend it with your loved ones or your hobbies instead of reading up on the next Tesla or GME news. You can also sleep soundly at night knowing your Robo-advisors oversees your portfolio.

Summary of Pros and Cons

PROS CONS
Low cost Expensive in the long run
Ease of use Reliant on algorithms
Diversified portfolio
No Lock-in period nor withdrawal fee
Low minimum investments

Verdict

So should you use a Robo-advisor?

As a beginner investor, yes, it is probably a good idea. However, if you have time or a bigger amount of money, it is best to go for DIY investing using brokerages. I would also advise you to read up on their algorithm strategy and asset allocations to see if you like their style before deciding.  

I am an active user of three Robo-advisors that are available in Singapore. Check out my Robo-advisor’s performance here!


If you have not signed up for any of the Robos, do use my referrals below and get your management fees waived for the first few months!

Stashaway – First $10,000 SGD fee’s waived for 6 months. Sign up here!

Syfe- Get a fee waiver on first $30,000 investment using my referral code: SRPRDR9KS

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