Everyone has the means to live comfortably, have a great retirement plan while sipping a cup of a favorite drink. And the best-trending way to do that is by investing. But, you have no idea and knowledge on how to invest smartly and it scares you. You might lose more than what you gain, you don’t know which investment to pick, it’s hard to calculate and understand the charts and trends. If this all sounds too familiar to you, then you can opt for a robo advisor.
The information expressed in the article is for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.
Should you have any doubts about the meaning of the information provided herein, please contact your financial advisor or any other independent professional advisor.
What is a robo advisor?
A robo advisor is an automated investment platform which is known to be sophisticated and uses advanced algorithms, designed to take strategies developed by human investment advisors and share them with everyone. It is fairly cheaper than traditional methods as there are no consultation feeds and easy to use. This has created an attractive option for all kinds of investors, ranging from young people just starting out to more established investors like retirees looking for help generating income.
Usually, a robo advisor would lay out some few general questions to create a summary for your portfolio:
- How much money do you plan to invest in
- Is it lump sum or monthly sum
- What’s your risk tolerance
- What are you looking to achieve from here
However, each robo advisor uses a different investing approach, so the underlying investments and portfolio allocation can vary depending on which robo advisor platform you are investing in.
Pros and Cons of investing with a robo advisor
- High quality low cost portfolios
An investment portfolio that’s composed of mostly low cost index funds have an 80% – 90% chance of outperforming anything else. Almost all robo advisors’ investment portfolio has traditionally been mostly invested in low-cost exchange-traded funds (ETFs), which includes stocks, bonds and other investments.
- Easy to use
All you really have to do is sign up for an investment account, answer a few basic questions and then have a pre-constructed portfolio ready for you.
- Tax Efficiency
If you’re investing in a taxable account, a lot of robo advisors actually help to increase your after tax returns. They offer automatic tax loss harvesting, which means taking advantage of temporary market losses to offset any taxable gains.
- Avoid emotions when investing
If there’s a time when the market is down, some investors tend to panic and withdraw their funds; but when the market is back up, they pump in more cash, However, timing the market is extremely difficult and challenging, resulting in lower long-term returns. You can prevent emotion-driven urges to buy and sell based on market sentiment by utilizing robo advisors to take a dollar cost averaging approach by investing a fixed sum every month.
- They’re not financial planners
As much as robo advisors help you to earn and save up money, they are not your personal financial planners. They are only really good at helping you construct a portfolio as well as maintaining it while financial planners will sit down, get to know you and give in depth advice for your financial situations.
- They cost more than all-in-one-funds
While they are typically cheap, they still cost more than your all-in-one funds such as a target date retirement fund. All in all, you’d be expected to pay 0.35% for all the fees involved every single year.
- Don’t guarantee performance
Robo advisors will expose you to the same amount of risk as other investments within the similar space. Sometimes your returns will be really positive and sometimes you’ll lose money in the process.
- Limited customization
Robo advisors allow you to set a few parameters, such as your risk profile and investment objectives, but that’s about it. In most cases, you won’t be able to change the investment process, choose (or exclude) individual investments in your portfolio, or change your exposure to specific geographic regions.
To have the acquired passive, indexed portfolios for clients, the majority of robo-advisors use modern portfolio theory. If such portfolios are set up, robo-advisors keep an eye on those portfolios to ensure great optimal asset class weightings are retained when fluctuation of markets happen. Rebalancing bands are used by robo advisors to accomplish this.
This method of rebalancing was previously frowned and shut down because it was too time-consuming with transaction fees involved. With robo advisors, however, it is both automatic and free. Tax loss harvesting is also another form of rebalancing which can be found in robo advisors and is rendered cost-effective by the use of algorithms. Selling shares at a loss to cover capital gains tax obligation on a comparable protection is known as tax loss harvesting.
How Robo Advisors make money
Robo advisors are often lauded for their low or no-fee structures, implying that those who invest in them are often getting a good deal. After all, robo-advisors will immediately pass on savings to their clients because they have less operating expenses and wages to pay. But there’s a question that makes investors ponder, how do robo advisors make money?
Even if the fee is very low, robo advisors usually charge a certain type of asset management fee. The fee is calculated as a percentage of the amount invested or known as assets under management (AUM). This is compounded by the fact that they handle billions of dollars. So, even though they all paid 0.1% – 0.15%, they’d still make a lot of money.
Some robo advisors can profit from a smaller spectrum of service fees such as termination fees, wire transfers, and other transfer fees. Although additional fees are not excessively costly, it helps to provide affordable wealth management in the long run.
Top Robo-Advisors Companies in Malaysia
Here are the top picks from Startups Zone, for users to pick a suitable company to stash your funds into for long term investment and future retirement purposes.
Wahed Invest – Launched in 2020
Wahed Invests’ mission is to provide a dependable, straightforward, and most importantly, investment product that’s easily accessible. Their portfolios have been created to assist you in getting started, regardless of the size of your account. Known for its halal investment platform, Wahed Invest uses robo intelligence and big data technologies to recommend a Shariah-compliant unit trust investment portfolio. You’ll be putting your funds into a portfolio that includes a diverse range of businesses and investments from various industries over Malaysia, United States, Sukuk and others.
MyTHEO – Launched in 2019
MyTHEO’s portfolio has undergone extensive back-testing and validation. The bounce back outweighs the downturn in a simulation of MyTHEO’s portfolio performance during the 2007 Financial Crisis, resulting in optimistic long-term results in the long run. This company understands that investing has its ups and downs, similar to how life is. However, they are there to advise you that fluctuations do exist and it shouldn’t bother you too much because the good times always outweigh the bad times. But everyone should be informed that long-term investments have a tendency to smooth out short-term fluctuation and volatilities. MyTHEO mitigates risk by investing in a variety of global asset groups. You can invest in thousands of companies worldwide, both in established and developing industries, through their broad range of Exchange Traded Funds (ETFs). Their investment policy and strategy is to diversify through asset groups, from stocks and bonds to commodities and real estate.
Raiz – Launched in 2020
Raiz will assist you in making proactive unit trust fund investments with Amanah Saham Nasional Berhad (ASNB). Although the Securities Commission Malaysia (SC) has not granted these funds a Syariah compliant status, local Islamic councils, both state and federal, consider it to be “acceptable.” Aside from rounding up funds, Raiz offers a variety of other excellent investment options. You can make a one-time investment by entering the desired amount on the app – Invest screen. You may also set up daily, weekly, or monthly recurring investments. All at the tip of your finger: a personalized investment portfolio, with no account minimums, no fees, and fractional investing. Raiz aims to make investing more available to all while also providing services that make saving and investing easy. Raiz is in collaboration between Permodalan Nasional Berhad (PNB) and Raiz Invest Australia Limited. For Raiz in Australia, it’s listed on the stock exchange-listed company with over 200,000 customers since 2016.
StashAway – Launched in 2018
Using a unique investment approach that focuses on economic fundamentals, StashAway has developed and led a team dedicated to developing straightforward investment solutions that are structured in the best interests of their clients and delivered through a seamless digital experience. Big industries such as Eight Roads, Asia Capital Advisors, Fidelity International’s proprietary investment arm, and other influential financial services and industry leaders have joined by investing more than $20 million USD in order to expand and have better wealth management options. Born in Singapore, StashAway successfully launched its services in Malaysia in 2018. By 2019, they have successfully served 100, 000 clients and they believe that it’s just a start.
|Companies||Launched||Min Initial investment needed (RM)||Annual Fees|
|Wahed Invest||2019||100||0.39% – 0.79%|
|MyTHEO||2019||100||0.5% – 1%|
|Raiz||2020||5||RM1.50 a month (invest under RM6,000) or 0.3% (invest above RM6,000)|
|StashAway||2018||0||0.2% – 0.8%|
A robo advisor alleviates much of this friction by allowing you to build a full portfolio with significantly less money and without having to manually measure how much of each protection you need to purchase or rebalance your portfolio. With robo advisors, algorithms are often used to adapt to market conditions. This just be what you need if you’ve been holding back and putting off investing because the thought of it scares you and you value convenience above all else.