In our fourth session of Personal Finance Seminars, we had Charlie O'Flaherty, Head of Digital Strategy and Distribution at Crossbridge Capital, share with us some investment wisdom and his experience developing the digital advisory specialisation, CONNECT by Crossbridge Capital.
What are digital advisories?
Digital advisories, or more commonly known as robo-advisors, are digital platforms that help you automate your investments.
For most of these platforms, you'll first sign up and be qualified as an investor. Following which, they'll determine your risk appetite and investment preferences using a questionnaire and make recommendations of different portfolios that are tailored to your profile. You then decide again whether or not to take up their suggested portfolio.
The upside of investing with a robo-advisory is that you'll get access to riskier assets like stocks, equities, and commodities, without having to sweat over the technical details. Many of the strategies and investing principles like the rebalancing of your portfolio is also automated.
This simplifies the whole investing process and you potentially get more growth than with savings accounts, fixed deposits, or bonds. However, this is not to say that the investment is risk-free – you'll still be exposing your capital to the usual market forces.
Why should you use a robo-advisor?
Besides getting access to other types of investments (diversification) and having a simplified investing process that is automated for you (ease of use), there are several benefits of using a robo-advisor.
For one, the fees of investing are lower and you can start with a lower principal. With StashAway, the minimum you need in your account is $0, while a minimum of $1,500 is needed for investments on CONNECT by Crossbridge. Also, the fees involved are usually a fund-management fee and ETF manager fee and is usually less than 1% of your fund.
Your alternative to equities and ETFs (exchange-traded funds) would be to invest with brokerage firms like Phillip Securities or OCBC Securities who charge a minimum of $25 per transaction on top of trading fees. You'll also need to have tens of thousands of dollars in capital. Hence, the barrier to entry is a lot lower with robo-advisors.
Second, you can withdraw or put in more money into your robo-advisor account at any time with no penalty. Compared to fixed deposits or bonds with lock-in periods, you'll also not forfeit any interest earned. Having said that, it also means that you may want to liquidate your investments at a loss, especially if the market is not performing.
One other feature is that robo-advisory platforms have an insured sum up to a certain amount. Depending on the service provider, your investment funds are usually insured up to $75,000, and that amount can be as high as up to $500,000 on CONNECT as the invested assets will be custodied by BNY Mellon’s Pershing LLC. This is an important consideration as you should protect your downsides.
What's the catch?
While it can be convenient and easy to have your investments automated, machines are not perfect.
Many of these robo-advisors pride themselves on proprietary algorithms and having robust strategies to ride over different phases of the market cycles. However, there are nuances to the market that a machine may not be able to pick out.
A lot of these strategies have been implemented based on past data and we cannot expect markets to always stay the same. Past performance is not indicative of future results; trends are not definitive.
That's where diversification matters, which is also why you should not put all your eggs into one basket. Besides investing with robo-advisors, you should also have a portion of your portfolio in stable, liquid assets.
What to look out for before investing?
With 10 years of experience in providing both digital advisories as well as tailored wealth management services, Charlie shared with us two things to look out for when investing in robo-advisors.
The first is that there are miscellaneous fees hidden across platforms. Some platforms separate their fund management fee from the ETF management fees, while others have maintenance fees or platform fees that are charged annually.
You should also account for the exchange rates of foreign currencies and potential taxes on your gains when investing in global assets like US stocks and commodities. These are all costs that can affect your return on investments.
Be sure to check out all the fees that you'll incur on a platform before making your investment.
While most platforms recommend portfolios based on the risk profile and questionnaire that users complete during sign-ups, first-time investors may not know exactly what they're investing in. An alternative that has worked for Crossbridge Capital is having portfolios that account for the investor's goals.
For example, think about the investor who's planning to grow a fund for retirement in 30 years, compared to another investor who aims to get a house in 10 years. The starting capital, the eventual exit goal, and the time frame of investment all play a part besides just the investor's risk profile.
With these in mind, you can further think about choosing a robo-advisory platform that better matches your investment goals. Platforms like StashAway and Kristal.ai have low barriers of entry and are suitable for entry-level investors who want a convenient and alternative way to invest. Then, there's Crossbridge CONNECT that's designed for accredited investors who may have a different set of goals.
These details may make investing sound really complicated, but it pays to learn. Being in the market means putting your money to work. Start by taking the first step to find out more about the different platforms and find one that better suits your needs.
CONNECT by Crossbridge
is a premium wealth management service with more than a decade worth of experience. Crossbridge Capital Group has over US$4.5M of AUM, and their Singapore office is regulated by the MAS.
The bare essentials of robo-advisors
Why you should invest with a robo-advisor
Investments for beginners: Simple tips for first-time investors