GoBear Bares All: Should You Invest with Robo-Advisors?
What if we told you that the financial investment scene in Malaysia is taking a robotic turn at this very moment? Yes, it may sound like something out of a movie about a fictional artificial intelligence (AI)-driven future, but it’s actually the truth — thanks to the arrival of robo-advisors!
That’s right. The new financial advisors in town are not real people, but technological advancements designed to help you make the most out of your investments. What exactly are these investment tools, and are they suitable for you?
Let the Bear front up against these robots for you!
What are robo-advisors?
Robo-advisors are a type of software with a unique ability: asset allocation. They can invest, withdraw and manage funds and assets for you, according to algorithms that allow them to determine your risk appetite and investing preferences.
For example, let’s say you’re an investor who’s looking to make high profits of around 60% to 80% of your investment within two years, and you’re comfortable with high levels of risk. A robo-advisor would identify opportunities with high expected returns that match this target, and allocate your assets to help you meet your investment goals within the specified time frame.
At present, robo-advisors are commonly used by financial institutions on their own, or as part of a hybrid advisory system as seen in examples like Schwab Intelligent Advisory and Personal Capital. The hybrid system caters to investors who would like to savour the benefits of robo-advisory — some of which are listed below — without sacrificing the human element of traditional financial advisory that we're familiar and comfortable with.
While they aren’t replicas of Jarvis from the Marvel Cinematic Universe or a Host from ‘Westworld’ (for now, anyway), robo-advisors are still highly intelligent tools that are designed to help you achieve your personal financial investment goals in a far more convenient way than ever before.
What are the benefits of robo-advisors?
Now that we’ve established a basic understanding of robo-advisors and what they’re capable of, let’s take a look at five defining benefits and how these can be useful for various types of investors.
- Affordable investment tools
As robo-advisory is almost entirely digital, it requires very little manpower. This makes it an extremely affordable investment tool, especially for beginners who would like to try investing for the first time. Just keep the annual management fees of your chosen robo-advisory firm in mind — which usually falls between 0.2% and 0.9% of your total investment for the year.
- No minimum investment requirements
Robo-advisors commonly operate without minimum investment requirements, which in turn lowers the barrier of entry for new investors into markets and opens more doors for those who would like to invest but do not have a lot of money to do so.
- No continuous monitoring needed
Robo-advisors are able to connect to and scan financial product markets at all times, thus allowing them to provide real-time updates around the clock or whenever you require it. This is a good feature for those who would like to keep a close eye on their investments but may not necessarily have the time to regularly sit down and monitor developments.
- Less emotionally challenging
If you’re managing your investments on your own, it can be difficult to make decisions in stressful situations, such as withdrawing your funds from investments that are suffering from losses but were once profitable. Robo-advisors remove this challenge by making decisions objectively based on figures, data and their algorithm, without emotional influence or distractions.
This list of benefits makes it easy to comprehend why robo-advisors are a trending financial investment tool, both in Malaysia and internationally.
Do robo-advisors have disadvantages?
It is easy to assume that robo-advisors have no disadvantages and represent a massive step-up in financial investment technology. This, however, is far from the truth — and it is the imperfections of robo-advisors which make them unsuitable for specific types of investors.
- Unable to anticipate needs
If you’re an investor who may not always have the time to update your robo-advisor on changes in your lifestyle and appetite for risk, robo-advisors might not be a good tool for you to use.
You’d be better off with a human financial advisor who can foresee your needs and manage your funds accordingly without waiting for you to submit a request. Someone who can anticipate how your financial needs may change if you’re getting married in the not-too-distant future and recommend relevant adjustments for your investments might be a better option.
- Not for experienced investors
Using a robo-advisor can rid you of the joy of making your own investment decisions and watching them come to fruition. If you are an investor who enjoys managing your assets on your own, and you’re confident in your ability to make profitable investment decisions with your funds, you won't find a friend in robo-advisors.
- Lack of creativity
Robo-advisors are not known for thinking outside the box or devising elaborate and creative investment strategies, as they operate within the confines of their algorithms and information that is made available to them. This makes them incompatible with experienced investors who enjoy crafting creative investment plans on their own.
If you fall into any of the categories above, or are somewhat unsettled by any of these downsides, robo-advisors may not be the answer for you when it comes to investing and asset allocation — or you may want to refrain from investing through a robo-advisor that isn’t a part of a hybrid advisory system.
Are robo-advisors safe?
The digital world is filled with dangers of its own — ranging from hacking incidents, to scams and the theft of private information. These potential threats, when coupled with the fact that we’re still unfamiliar with robo-advisors, can make these investment tools seem rather questionable and unreliable.
Fortunately, in Malaysia, the provision of services by robo-advisors and the usage of these services is governed by the Securities Commission (SC) through its Digital investment Management framework.
This framework sets out the requirements that a robo-advisory entity must fulfill before it can operate legally on local shores with a license from the SC, while also identifying specific conducts and measures that must be taken by these entities to protect their investors.
The Digital Investment Management framework is already running actively too, so you don’t have to worry about it being just a plan. It began accepting license applications in May 2017, and in late 2018, StashAway became the first robo-advisory platform to receive an operational license.
So, do you want a robotic future?
By now you should be able to deduce that robo-advisors are more suitable for some groups of investors over others — and that the answer to the main question of this article, on whether you’re ready to invest with them, depends on which group you identify with.
There is no doubt that these investment tools are here to stay though, and in the same way that the world of finance and investment changes over time, you too may want to change your investment and financial preferences as time passes to take advantage of robo-advisors in future.