Robo-Advisor FAQs ahead of SCxSC

SCxSC annually showcases the latest developments in digital finance aka fintech. It’s happening on the coming Monday and Tuesday, 6th & 7th November. I’m really looking forward to the discussion “Towards a Digital-only Investment Mode” on the first day which will have the COO of Betterment as a panellist. Betterment from the US is one of the earliest robo-advisors, something that I’m very excited about.

So ahead of this event, here is a list of FAQs on all your burning questions on what a robo-advisor is but were too afraid to ask.

What is a robo-advisor?
A robo-advisor replicates how a professional human financial planner would invest for you with the help of technology. They will match your financial goals to funds that suit you.

So why don’t I use a human financial advisor instead of a robo-advisor?
Because you need to pay thousands for a comprehensive financial plan from a human advisor. And the human advisor generally only finds it worth it to manage higher amounts of money for a higher price. A robo-advisor doesn’t complain about how small your money is and charges the lowest fees around.

Does the robot know what it’s doing?
See Q1. The robo-advisor replicates the process of a human investment advisor. So it is at least as good as the human. But the robot can do more: handle large amounts of data and customers, do things much faster, match investments to your needs more accurately, act more readily if there are big market movements, etc.

Is a robo-/human advisor the same as a fund manager?
Absolutely not. Say you don’t want to take too much risk but your uncle does. A fund manager managing the same fund for you and your uncle can’t split the same fund into two or more. And if the fund manager does split the fund into one for you and one for your uncle, she has no time and not to mention not paid to advise you and your uncle to buy different funds. A robo-/human advisor will be able to tailor-make advice for you and your uncle separately.

So a robo-advisor is a platform to sell funds?
No, it’s not. Robo-advisors don’t earn commissions from selling funds, just a small annual fee for advice. A robo-advisor asks you what your goals are and manages your money to try to reach those goals without using your money to generate fund commissions. You also can relax and don’t have to decide what funds to buy or switch into.

So where does the robo-advisor put my money?
Into exchange-traded funds or ETFs because they are very low cost and the cost-savings boost your returns over the long-term.

Some financial guru said his portfolio will kick the robo-advisor’s ass because an ETF invests blindly.
This financial guru’s portfolio, like the fund manager’s, can’t cater to you and your uncle together. The “blind” investing of ETFs is called passive investing which many now prefer to active investing because of the low-cost advantages. Think low-cost airlines as a new way to travel vs expensive high-cost premium airlines used by expensive travel agents in the past. A robo-advisor will choose a handful of low-cost, passive ETFs to accurately match your needs or your uncle’s.

But the financial guru made 20% p.a. over the last 3 years. Isn’t that good?
The World ETF, US ETF and China ETF are examples of ETFs that returned 15-20% p.a. in ringgit terms over the last 3 years investing passively without lifting a finger. If you followed the financial guru, you’d have to spend many boring hours researching his every move.  Don’t you have better things to do like developing your career or spending time with your boy/girlfriend? Point is, it’s better investing according to your needs than someone else’s and a robo-advisor allows you to do that.

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