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Robo-Investing 101: How To Start Investing for the First Time

Robo-Investing
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The industrial revolutions introduced automation, and it has expanded beyond anyone’s expectations. Different machines are now used for the complex human process in many industries. Machines work efficiently and replicate human work accurately.

The investment industry has not been left behind. Robo advisors are now being used for financial investment. Beginner and experienced investors use Robo investors to help maximize the funds at a comfortable risk level.

Choosing the best Robo advisor can be challenging at times. You need to compare the different features, funds, fees, etc. This guide will help ease your search process for your ideal Robo advisor.

What is a Robo Advisor, and How Does It Work?

A Robo-advisor is a digital platform that provides automated, algorithm-driven financial planning services with no human supervision. However, some Robo advisors have a human, financial advisor in their package.

Most Robo-advisors will collect information from their clients about their financial situation and financial health through an online survey. They then use the data to offer financial advice to their clients and automatically invest the client’s assets.

The best Robo advisors will be easy to set up and have robust goal planning, portfolio management, account services, security features, low fees, comprehensive education, and exceptional customer service.

How Robo-Advisors Work

Modern Robo advisors have changed how clients invest by delivering the service direct to the consumer. Robo advisors can now have more complex tasks such as investment allocation, tax-loss harvesting, and retirement planning through enhancements.

Robo-advisors work by investing your money in different ETFs. ETFs are diversified collections of stocks or bonds. The platform you choose will give you exposure to various sectors, companies, and industries. Robos will build your portfolio based on their survey to know your financial situation, investments experience, and risk appetite.

Most Robos are built on the Modern Portfolio Theory investment strategy. This strategy maximizes your investment returns while minimizing the risk of losing your money in the long term by spreading your money across different investments. This will allow you to grow your portfolio steadily over time.

What are the Pros and Cons of Robo Advisors?

The Pros

Here are some of the reasons why you should consider investing with a Robo advisor:

1. They are Easy and Convenient to Use

One of the biggest reasons people prefer investing through Robo advisors is that they are easy to invest in. You do not need to research the ETFs you are investing in or deal with the stock market intricacies, submit massive heaps of paperwork or invest yourself.

All you need to do is go online, open an account, create your profile, and let the platform do the rest.

2. Robo-Advisors Have Low Barrier to Entry

Most Robos have a low investment amount. This is great if you want to start investing but do not have much money to start.

You can gradually increase your deposits as time goes by.

3. Robo Advisors Have Low Trading Fees

Compared to traditional wealth managers, Robos charge a very low percentage of your total investment. It does not matter how big or small your investment is; their fee structures are very forgiving.

Another advantage is you do not get charged for depositing and withdrawing on the platforms. So you do not lose money unnecessarily while using the platforms.

4. They are Customizable

Robo advisors are customizable to a certain degree based on your needs, thanks to their algorithms. The algorithm considers your income, risk appetite, financial goals, and demands and offers advice based on your needs.

Remember, the efficacy of the advice solely depends on the platform’s algorithm.

5. They Offer a Diversified Portfolio

A diversified investment portfolio is essential in reducing risk since you cannot go broke if one of your assets crashes.

Robo advisors are like hedge funds and offer a mix of assets, but instead of having a human manage your money, an algorithm does the work for you.

6. Robo Advisors Require Low Commitment

Most investment funds have a lock-in period, while Robos allow you to liquidate your investments at any time with no penalties.

You can withdraw your money at any time and easily switch from one Robo advisor to another if you find one better suited to your needs.

The Cons

Like any other thing in the world, investing with Robo advisors is not all rainbows and sunshine. Here are some of the drawbacks of using them as your way of investing.

1. They Cannot Deviate from the Algorithm

With rob advisors, you can only customize your investment to a certain degree. You cannot entirely deviate from the parameters of the algorithm.

So if you are the type of investor who needs to control every aspect of your investment, they are probably not for you.

2. Might Be More Expensive That Investing in a DIY Portfolio

Robos may charge lower trading fees, but you might incur other hidden fees once on the platform.

DIY investments are charged per transaction, which might be cheaper if you are a buy-and-hold investor.

3. A Crowded Market

The success of Robo-advisors has led to many companies cropping up. The hard work of knowing where to invest is already done, but you need to know which company to invest with. Sometimes with will be hard to evaluate where you will get the best customer service

Coins Stack and Graph

Is Robo Advisor for You?

We have mentioned some disadvantages together with advantages. So how do you know you are the type of person to use a Robo advisor?

Here are some of the ways to know if Robo advisors are for you:

1. If You Do Not Know How to Invest Globally

The main reason Robo advisors have become so popular is that they offer newbies a chance to start investing even without knowing about global markets. You need to transfer your money on the platform, and they will do the rest of the work. The algorithm will help your money grow.

2. If You Want to Invest in a Passive System

If you are a lazy person who doesn’t want to lift a finger while investing, then Robo advisors are for you. Robo advisors will invest your money with little effort. They rebalance your portfolio based on market changes, and you do not need to do anything.

But you will pay for the convenience through the trading fees.

3. If You are Looking for a Fast and Cheap Way to Start Investing

You do not need much capital to start investing in Robo advisors. So you can start with the amount you have instead of waiting for years to start.

When you put off investing, you will be in a bad position in the future. Just start. You do not even need to read the cumbersome investment books to begin investing.

4. If You Are Looking for a Cheaper Alternative from Your Investment Manager

If you already have an investment manager who is not pleased with their performance or charges are too high, it’s time to switch to a Robo advisor.

Robo Advisor Platforms are Available in Singapore

Here is a comparison table for Robo advisors available in Singapore:

Robo-advisor Minimum Initial Investment Platform Fees Annual Management fees Funding options Expected Annual return
Autowealth $3,000 US $18 0.50% Cash 27.2% net of fees
StashAway No minimum investment 0.8% (Up to $25,000) Cash &SRS 34.69%
Smartly $50 1% (Up to $10,000)/ 0.7% (more than $10,000) Cash Not available
Endowus $10,000 0.60% for first $200,000

0.40% flat fee for any amount for CPF or SRS money

SRS, Cash & CPF 15.69%
Syfe No minimum investment 0.65% for sum invested of less than $20,000 Cash & SRS 23.10%
Connect US $1500   0.20 to 1.25% Cash N/A
DBS Portfolio S$1,000 and US$1,000 0.75% Cash 10.3% (FY2020)
Kristal AI No minimum investment 0 – 0.3% Cash N/A
Money Owl S$50 per month 0 to 0.6% Cash 26.55%
Philip Smart S$300 0.50% Cash 11.70%
Squirrelsave S$1 0.50% Cash 22.80%
Utrade Robo S$5,000 0.88% cash 22.00%
OCBC Roboinvest US$100 0.88% Cash N/A

Best Robo Advisors for Beginners

  • StashAway
  • SquirrelSave

Best Robo Advisors for Experienced Investors

  • Endowus
  • OCBC Roboinvest

Additional Tips When Choosing a Robo-Advisor

Choosing the right Robo advisor is not a small task. Here is a list of the things you should look out for when choosing the right Robo advisor to match your financial goals.

1. The Management Fees

Most platforms will offer lower fees than most traditional financial advisors. Robo advisors make money by charging an annual management fee based on the assets invested, and the fee is charged as a percentage.

Robo advisors will manage your investments for free, and these are great for investors who will start small. The downside is the range of portfolios they offer. However, they could be a great option if you are beginning.

Ensure you choose a platform with reasonable management fees based on the returns and the range of investment class assets at your disposal.

Also, keep in mind that you can change between Robo advisors at no extra cost if you are not satisfied with the services offered.

2. Investment Options

Robo advisors are relatively new in the financial market. So their existence is only available in a small bull market where any excellent performance of one advisor, compared to others, is only due to its asset allocation as opposed to long-term success.

So when choosing the right Robo advisor, be on the lookout for their asset allocation since it plays a huge role in great returns. In most cases, these platforms invest in exchange-traded funds. So you should consider the number of assets included in the portfolio.

If a Robo advisor does not trade in EFTs and you are not comfortable investing there, look for other advisors online that offer a personalized portfolio that you are comfortable with.

3. What Are Your Goals?

Before you invest with any Robo advisor, first think about your goals. Different portfolios will be helpful for other goals. Once you know what you want, you can decide if the Robo advisor’s investment model will help you achieve your goals.

Choose a portfolio that rebalances so that you can take advantage of portfolio efficiencies such as tax-loss harvesting and automatic reinvestment. In some cases, you will need help to save up for different goals.

Financial Graph

Tools to Help You in Goal Planning

A good Robo advisor should have tools that help their investors plan financially. They should teach you about their risk tolerance and what you need to do to reach your short-term and long-term goals.

In addition to risk tolerance, advisors should consider how long their investors want to take to reach their goal. So go for a Robo advisor to have a personalized portfolio to help you reach your personal goals.

1. Consider the Account Types Offered

In most cases, you will find that most online advisers offer two types of accounts: Either retirement accounts or taxable accounts. Some manage trusts and others 401(K).

The 401(k) accounts are those that match dollars and should be on top of your list when considering the Robo-advisor to go with because they guarantee a return to your investment.

Clients with a high net worth should consider the taxable accounts and IRA contributions for a long-term investment such as retirement. Others offer portfolios for different purposes.

Make sure you choose a platform that will provide you with the maximum returns on your investment.

2. The Minimum Investment

The minimum investment varies across different Robo advisors. They are those that do not require any minimum investment for you to open an account with them, then those are those that demand a high initial investment. Others need you to make deposits after a certain specific period.

Ensure that you choose a platform that is comfortable with the deposit required. Do not go for a platform that requires a considerable investment while just starting. Invest gradually and widen your portfolio over time.

3. Read Through the Fine Print

To ensure that you keep your expenses down, robos usually offer low-cost ETFs and index-based mutual funds. However, you should look beyond the simple portfolio construction and get to know the type of ETFs and mutual funds you are being offered.

There are those that offer in-house investment funds, and other offer funds from different issuers to create the ideal portfolio. The platform should explain how they do their due diligence to choose the funds they place for asset allocation.

Look out for any hidden fees that you might incur by investing in different portfolios.

4. Are There Human Financial Advisors on The Platform?

Keep in mind that most Robo advisors offer investment services but no human guidance. Financial planning and investment management are not the same, and they both require a different approach.

For financial planning, you will require the guidance of a financial advisor. You can get dedicated advisors offering individual support on some platforms, which is excellent if you are a newbie.

If there is no human advisor, ensure that you invest in course material and learn how to invest best. The course available will go a long way in your financial journey.

Most advisors have learning materials on their websites that you should use before you start investing.

5. Check Reviews on the Customer Support

Before choosing an advisor, make sure you know when customer support is available for a platform. What hour of the day or night can you access their services?

Can an investor contact a licensed advisor in case of anything? You can check their review online. Go with the Robo advisor with the best reviews.

6. The User Interface

Another thing to be on the lookout for is the platform’s ease of use. Does the design appeal to you? Is it easy to navigate?

Remember, you will be on the platform a lot of time, and you will need to have an outstanding customer experience.

As an investor, choose a Robo advisor with a platform you enjoy using.

7. Account Minimums

This is a significant factor when choosing an advisor. If you are a new investor, you want an account with no minimums.

Usually, Robo-advisors have account minimums ranging from $0 to $100,000.

How Do I Open a Robo-Advisor Account?

The first thing you should do is visit the Robo-advisor’s website or download the app of your choice. All robos have different registration processes, but most will ask you to fill in the following information.

  • Name
  • Mailing address
  • Date of birth
  • Social Security number
  • Years of investing experience
  • Annual income and net worth
  • Investment goals
  • Risk tolerance

All the information is necessary to comply with the federal regulation and also for them to match you with investments reaching your financial goals and ability to tolerate risk.

What Is Tax-Loss Harvesting?

Tax-loss harvesting by Robo advisors refers to the automated selling of securities in a portfolio to incur losses on purpose to offset taxable capital income or capital gains within their platform.

Tax-loss harvesting seeks to help investors pay the lowest taxes possible in non-tax-sheltered accounts as per the financial guidelines.

What Happens If a Robo-Advisor Goes Out of Business?

Robo advisors go to great lengths to assure their clients that their funds are secure on their platforms. Clients’ funds are kept in a separate bank account to prevent the Robo-advisors from using it.

Investor holdings are kept in a custodian account. However, if a Robo advisor goes out of business, you will be required to liquidate your assets rather than transfer them to another advisor.

Dollar Bills

Why Are Robo Advisors Better Than Personal Financial Advisors?

1. Investments are Based on High-Quality Portfolios

Financial advisors create investment portfolios from their education and experience, which could be limited in some cases. Robos, on the other hand, have access to high-quality portfolios that are built based on your needs

2. Robot’s Lack of Emotion

Humans use their instincts to make a risky investment. This means it might pay off or not. Research shows that people use their emotions when selling and buying their assets, but they sometimes do a lousy job by selling high and buying low.

On the other hand, Computers do not have emotions and will make the best decision for your money. Following your feelings while investing is generally a bad idea for investors.

3. Robo-Adviser Used Low Fees Funds

Most Robo-adviser invest in low-cost ETFs from popular providers only. So you will be sure to know that your portfolio has high liquidity with low fees.

4. Low Manageable and Predictable Fees

Most advisers charge a specific percentage for the assets under management. The average Robo-adviser charges 0.25% to 0.35% based on your chosen services.

A human adviser charges 1% for their service. This means you will pay a human adviser four times more than a Robo adviser charges.

5. Automated Tax Loss Harvesting

You can easily take advantage of tax-loss harvesting with a Robo advisor since it is automated. A human cannot physically keep up with the process the way a computer can.

Related Questions

1. Are Robo Advisors Regulated in Singapore?

Robo advisors in Singapore are regulated by the Monetary Authority of Singapore (MAS). They must also be licensed under the Securities and Futures Act (SFA) or the Financial Adviser’s Act (FAA).

2. Do Robo Investors Make Money?

Yes.

They earn money mainly from the fee based on assets under management (AUM). Most Robo advisors charge an average of 0.25% per year.

3. Which Robo Investor Has Best Returns?

The best Robo investor in Singapore is Endowus. The platform offers high-quality customized asset and portfolio allocation for its users. It featured a diversified portfolio with a tiered fee structure system meaning the more your investment is, the less fee you pay.

4. Can You Lose Money with Robo Advisors?

Robo advisors are relatively safe since most invest their money in low-risk ETFs. You get to invest in assets across different classes.

There is a chance you can lose money even with rebalancing and tax loss harvesting.

5. How Much Should I Invest in Robo?

When joining a Robo advisor, your first interaction will be with a questionnaire in most cases. Here, the advisor will assess your risk appetite, income and advice on how much you should invest in the platform.

6. How Does a Robo-Advisor Work?

Robo-Advisors invest your money in different ETFs. ETFs are a diversified collection of stocks and bonds; your Robo will expose you to thousands of various industries, sectors, and companies. They build customized portfolios for their clients based on questionnaires that gauge your financial situation, investment experience, and risk appetite to get excellent returns.

Robo advisors aim to increase investors’ returns while minimizing the risk of losing your money.

7. Should You Use Robo Advisors?

Robo advisors are the easiest way for anyone to start investing. They are a great place to start learning about the inner workings of investing while learning how to build your investment journey.

Robo advisors are a great option if you are a new investor and do not have the time to research how to start and execute an investment plan. It is an excellent plan to start with a small capital sum.

Closing

Robo advisors are relatively new in the financial industry, so we cannot gauge them based on their history. However, they have seen significant growth over the years. They are robust algorithm-driven financial investment tools that help users invest in different asset classes across other markets across the world.

Before you invest with any Robo advisor, make sure you do extensive research and know which platform has the best features for you. Consider the minimum investment, the management fee, and whether the platform has a human advisor.

Key Takeaways

  • There are many Robo advisors in Singapore. Choose one that matches your financial needs.
  • Evaluate the service provided by the advisors before settling one.
  • Determine the amount of human intervention you need while investing. Do you need an automated process, or do you want to talk to somebody regularly?

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