No doubt both robo-advisor and robo-advisory are the latest buzzwords in Malaysia’s financial services landscape. It comes as no surprise to me that it has now become the talk of the town. In 2017, Securities Commission Malaysia (SC) introduced a regulatory framework to facilitate Digital Investment Management services. The framework sets out the licensing requirements for the offering of automated fund management services to investors.
StashAway, headquartered in Singapore, is the first robo-advisor to provide robo-advisory services in Malaysia. It has launched its robo-advisory platform in early November 2018 after obtaining a Digital Investment Management License as approved by SC. StashAway has since rolled out its robo-advisory services to initial 5,000 investors who had signed up for the waitlist previously.
If the news fails to excite you, it means that you’ve not learned enough about robo-advisor or robo-advisory services. It’s indisputable that robo-advisory is one of the biggest breakthroughs in the financial services industry. It has gained traction worldwide at an exponential pace for the past decade.
What is a Robo-Advisor?
Before giving you a deep dive on the topic of the day, what exactly is a robo-advisor? As the name implies, clearly everyone can give a rough guess that there’s an element of robotics. In layman’s terms, robo-advisor basically refers to an application of algorithms in providing financial planning or investment management services to the investors with minimal human intervention.
To put it simply, imagine that you were once talking to your personal financial advisor face-to-face. And your advisor would tailor a personal financial plan to cater to your needs based on your financial situation and financial goal. All these are virtually non-existent if you are using a robo-advisor. But it still gives you the same desired outcome by just dealing with your own laptop screen.
How does Robo-Advisor Work?
Robo-advisor can be as good as a human financial advisor, if not better. It replicates what a human financial advisor is capable of doing traditionally. Robo-advisor provides primarily financial advice to the investors in respect of asset portfolio allocation. It can select investments, allocate and re-balance an investment portfolio automatically based on clients’ risk preferences and financial goals. Robo-advisor gathers client information through online questionnaires without any human interaction.
What Are the Benefits of Using a Robo-Advisor?
Robo-advisory industry has grown rapidly since the emergence of Betterment in 2008, the very first robo-advisor in the world. According to Statista, assets under management in the robo-advisory industry amount to US$540 billion in 2018. And the segment is expected to increase with a CAGR of 36.2% to reach US$2.5 trillion by 2023. There are questions that may float through your mind now. “Why is using a robo-advisor so captivating?” “What are the benefits of using a robo-advisor?”
Here are the 4 key benefits of using a robo-advisor to manage your investment portfolio.
1. Low fees
In the past decades, professional financial advice has always been accessible only to sophisticated investors or high-net-worth individuals due to hefty fees.
The most irresistible competitive advantage for using a robo-advisor is the low fee charge. The fee is significantly lower as compared to getting a personal financial advisor. Yet, your investment portfolio is professionally managed. For example, StashAway charges a management fee annually range from only 0.2% – 0.8% in Malaysia.
Robo-advisor is much more cost-efficient as it cuts out the middleman, making it affordable to everyone.
2. Low entry requirement
Further, robo-advisor generally has a very low entry requirement across the industry. For example, StashAway doesn’t require a minimum balance for investors to start investing in Malaysia. Not to also mention that the charge for any transaction is free as well. You can either withdraw or transfer money anytime.
Unfortunately, this may not be the case if you wish to engage a certified financial planner in Malaysia. More often than not, your request may be rejected if it doesn’t meet a minimum threshold. At the end of the day, it’s all money talks.
3. No specialized financial knowledge required
Conceptually, robo-advisor uses artificial intelligence to manage an investment portfolio. A robo-advisor mimics the way a human thinks and acts under different circumstances using artificial intelligence. To make it more interesting, robo-advisor commonly applies Modern Portfolio Theory. The objective is to maximize the expected return for a specified level of risk even though it’s continuously evolving with more advanced theories and data.
It sounds completely alien to you with all the technical jargons isn’t it? It doesn’t seem to be a selling point to use a robo-advisor. But, wait a second. Do you know how does an airplane work before you board a plane to travel to your next destination?
That’s exactly my point. Any mom-and-pop investor on the street can start using a robo-advisor with just a click of a few buttons. All it matters is whether the robo-advisor that you’re using has a proven investment strategy. You can easily benchmark its historical returns against other investment alternatives. Or use a backtesting approach to assess the reliability and performance of the robo-advisor.
4. No emotions
“Let’s wait until the stock price rebound, it won’t go down further.” Sounds familiar? The costliest mistake that investors often make is hoping for a miracle to happen. Investors tend to get really anxious during a stock market crash or get too excited during a bull market. That’s how a knee jerk reaction always happen in the stock market.
“Avoid the market noise and focus on your long-term goal.” It’s always easier said than done. Especially for those who can get weak at their knees easily. This is a perfect situation why robo-advisor comes into play. The investment process is fully automated when you use a robo-advisor. It follows preset rules and doesn’t allow human emotions to cloud the judgement to affect decision-making. Meanwhile, you can continue to eat popcorns while enjoying Netflix on your couch.
No doubt the advent of robo-advisor benefits many novice investors especially the millennials. The rise of robo-advisory is regarded as a watershed moment for the investment management industry in Malaysia.
It’s unavoidable that the use of robo-advisors will transform the traditional fund management services in Malaysia in years to come. Certainly, the incumbent capital market players have to step up their games to avoid losing competitiveness to robo-advisory firms.
Of course, there’s no one-size fits all investment. And there’s no risk-free investment. You may take it with a pinch of salt. But more importantly, do not limit your options before sparing a few minutes to understand how robo-advisor can benefit you as an investor.