This is part of the Robo Advisor series that I’m currently writing. You can read it out of order, but in case you’ve missed them, here are the posts in the series:
The popularity of robo-advisors surged in 2020, when pandemic lockdowns forced Malaysians to stay indoors. Seemingly overnight, robo investing became the trendiest investing tool in town. But like any investing platform — trendy or not — it has its pros and cons.
Investopedia defines robo advisors as “digital platforms that provide automated, algorithm-driven financial planning services with minimal human supervision”.
Basically, these are apps or digital platforms that will manage your money for you. However, instead of a human advisor, you get an algorithm determining how your money will be allocated.
When you sign up to a robo-advisor, they will usually ask you a series of questions that will determine your risk appetite. Based on your answers, they will determine you risk tolerance and determine what investments are suitable for you.
For example, if your answers determined that you have a more conservative risk profile, your investment portfolio will probably contain more lower-risk bonds. If you choose a more aggressive profile, you may have more equities than bonds.
Robo advisors will also “re-optimise the fund” for you. So sometimes during times where the market is very volatile, the robo advisor will shift your funds around various instruments to “shield” you from taking on too much risk. How often they do this depends on the robo-advisor. Stashaway, for one, says that while they check for rebalancing “daily, our re-optimisation happens only from time to time (maybe once a year).”
Robo-adivsors in Malaysia
I’m not going to write at length about the pros and cons of the many robo-advisors in Malaysia as so many have done a better job, such as iMoney. But here are the robo advisors in Malaysia:
- My Theo
- Akru
- Raiz
- Stashaway
- Wahed Invest
- Kenanga Digital Invest (read my honest review)
Pros: The benefits of using robo advisors
1. You can start investing with a small capital
The great thing about robo advisors that is that you can start with a small sum of money. For example, you can start with a minimal deposit of RM100 with Wahed. If you are to buy foreign shares from a broker, RM200 is often not enough.
For example, the Vanguard 500 Index Fund ($VOO), as of this writing, costs about $US398 per share. That translates into roughly RM1,600 and that’s before factoring in broker fees, which, depending on which broker you use can be as high as US$8 per transaction. If you buy your foreign shares through a bank, it’s even higher.
Investing in foreign markets is challenging because of the red tape and high capital required. However, robo advisors make it not just simple, but affordable to invest because you’re able to buy fractional shares. This will enable many people to start their investing journeys quickly.
2. Easy to use
Investing is almost effortless with most robo-advisors. Most allow you to automate your investments . So that will mean that your investing can be a regular, automatic thing — a leave it, and forget it system.
3. Easier access to foreign markets
My Stashaway portfolio has stocks from around the world and I can get this with a click of a button.
4. Low fees
Malaysian unit trusts often come with expensive fees. If you buy them through agents you often end up paying a 5% sales charge before you can even invest a ringgit.
On top of this, you have to pay an annual fee that can be around 1.5% to 2%.
A robo advisor usually has an annual charge of 0.5% or 0.7%. (However, do note that this does not include the expense ratio of an ETF which can range from 0.05% to 0.5% or more. It also does not include a bunch of fees such as exchange rates, witholding taxes and more.)
Compared to unit trusts and if you factor in expensive brokerage fees, robo-advisors give investors an easy, affordable way to invest in foreign and local markets. Though, be careful, the management fees can really add up over the years as your portfolio increases in value. (I’ll talk about it under the “Cons” section.)
5. Easy diversification
Diversification is the key to reducing the risk of your investments. And robo advisors make it really easy to do it with the click of a button.
You can diversify by geography or by investment assets. For example, in my Stashaway portfolio, not only do I have investments in China, United States, Canada and Australia, I have investments in commodities, gold, equities and bonds.
Cons: The downsides
1. You can get complacent
Robo-adivisors make it so easy to invest that it could make one complacent and maybe a little less diligent about learning about finances, or at least, the intricacies of investing. Believe me, each day I discover something new about finance that personally impacts me. There’s value in learning to DIY your investments. Once you learn it, it’s a lifelong skill that will benefit you in the long run. And you won’t get easily duped by scams and unscrupulous financial “advisors”!
It’s always important to know what you’re investing in. It’s also very important to know how your investing platform operates. How does it work? What services do they provide? Are the fees worth their services?
2. The fees
Ironically, a robo-advisor’s fees is also its downside. Some investors wonder why they should pay a percentage of their portfolio to a robo-advisor every year when they can easily DIY and buy ETFs directly from a broker.
“The higher your portfolio value, the more expensive the fees will be. A $1million portfolio with Stashaway will set you back by $3,925 in platform fees alone just for that year,” wrote Ngooi Zhi Cheng, a Singaporean financial planner in his article, A critical review of my 4 years with Stashaway.
For one, if your portfolio is performing poorly, you’d still have to pay a robo-advisor’s annual fee on top of the ETFs’ expense ratios. Additionally, there are other fees to pay for, such as exchange rates and the 30% withholding tax that the US imposes on dividends. It makes sense to keep all fees to a minimum to maximise returns.
3. Lack of control
The longer I invest with robo-advisors, the more I realise that it’s important that my preferences are aligned with the robo-advisor’s investing or allocation strategies.
For example, I am not terribly fond of ETFs that are overly focused on one geography or sector such as the KraneShares CSI China Internet ETF (KWEB) — I feel that it is not diversified enough and exposes me to far more risk than I liked. And my thoughts were proven right when KWEB stumbled in 2021, dragging my entire Stashaway portfolio down.
But I had no control over the ETF selection or its allocation size, which formed a big percentage of my portfolio. Neither did I have control over how Stashaway “rebalanced” my portfolio. After months of freefall, Stashaway sold off KWEB due to sanction fears … right before it shot up by 39.72% a few days later. Stashaway told investors about having a “long-term” view on KWEB, so that move was unexpected.
Stashaway, in essence, sold at KWEB’s lowest point, cementing losses for many. Although it’s impossible for Stashaway to know that KWEB would shoot up the moment it did, for investors like me who prefer to hold on to their investments for a longer period of time, it’s galling to have someone make that decision for you.
Robo-advisor platform Endowus had an interesting (and cheeky) article, Not all robo-advisors are created the same, where it compared its performance to its competitors. Although the article may have an agenda, I agree wholeheartedly with this statement:
It is what funds you buy and how you do asset allocation that drives the bulk of long-term returns.
Stashaway tends to go “overweight” on certain countries and sectors, has an active asset allocation methodology and thus have “largely tactical and very active allocations that massively deviate from any global passive equities indices, and cannot be deemed as strategic or passive in nature. Not by any stretch of the imagination.”
I realised I wasn’t aligned with Stashaway’s more “active” investing style and riskier thematic/geographically focused funds. And if Endowus was available in Malaysia, I’d probably be more comfortable with their approach.
4. No human touch
For some people, it’s important to have a human connection. They need someone to understand what their financial goals are and how they can meet them with their investments. (Getting a good financial advisor that has your best interest at heart and gives you agenda-free advice, however, is a whole different story.)
Well, robo advisors don’t give you that human connection. But that’s part of the reason why they are more affordable as your money is being managed by algorithms not human beings with a paycheck.
5. You may end up over diversified
This is something new I learned in a Reddit group. One thing I find interesting is that robo advisor portfolios often contain half a dozen or more ETFs, and sometimes they have overlapping stock holdings. For example, you’re considered over diversified if your portfolio contain these three ETFs: Vanguard Total World Stock Index Fund (VT), Vanguard Total Stock Market Index Fund (VTI) and Vanguard 500 Index Fund (VOO). Why? Because these ETFs have almost similar top American holdings, one of which includes Apple. In essence, if you have all three ETFs, you will be invested in Apple thrice.
Well, Apple is a great company, you say, what’s the problem? Well, if anything happens to Apple and the shares take a tumble, that could drag down this portfolio significantly.
To use an analogy — let’s say an ETF is a plot of land. You happen to own four plots of land, and all of them have apple trees. If a virus sweeps through your farm, all your apple trees on all four plots end up with rotten fruit, you will suffer quite a bit of loss. However, if you only have one plot with apple trees, you will incur less of a loss when the virus strikes.
Not convinced? Listen to the explanation of an actual finance professional.
According to Investopedia, over diversification happens when you:
- Own too many similar funds
- Have too many individual stocks
- Have a “fund of funds” – a pooled fund that invests in other funds
Over diversification leads to increased investment costs, below-average risk-adjusted returns and you may end up monitoring way too many investments than necessary.
To quote John Bogle, “… to earn the highest returns that are realistically possible, you should invest with simplicity.”
So, should you use robo-advisors?
It really depends on your situation, preferences and goals.
I think robo-advisors are great for beginner investors with limited capital. It’s a great way to get started in investing, to test the waters, so to speak. But more intermediate and experienced investors may feel straitjacketed by the lack of control and sometimes, transparency over the costs, allocation and investment choices. That said, while I am buying US ETFs from brokers like MIDF and Rakuten Trade, I am still using robo-advisors to get access to bonds, commodities and gold. For now.
It’s tempting to just jump all in when “everyone is doing it” or because some person on the Internet says it’s a brilliant idea. The FOMO is real. But in the end, it’s very important for us to be aware of the pros and cons of any investing platform and do your due diligence before putting your hard earned money into anything.
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Elizabeth Tai 