Saturday, 2024 July 13

Opinion | Robo-advisors cannot replace human financial planners

As of 2020, robo advisors in Singapore are estimated to command about SGD 1.5 billion (USD 1.1 billion) in assets under management, spread out over about 105,000 users. This is only a fraction of Singapore’s SGD 3.4 trillion asset management industry, but its growth is particularly promising, especially among younger users.

However, it has been said that robo-advisors lack the human element and are unable to provide truly tailored and holistic financial planning services for their clients. With that, are robo-advisors deemed an asset to the investment industry? Do they have a solid place in the investing world, or are they something that should be used as a supplement?

In this article, we discuss the outlook on robo-advisors in the industry and whether they can truly replace financial planners.

What can robo-advisors do?

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services. They collect information from clients about their financial situations and future goals through online surveys, and then use the data to offer advice and automatically make investments.

Depending on the type of portfolio you are part of, robo-advisors may react immediately to market changes. This is a more efficient method compared to a financial advisor, whom you would need to physically meet to discuss and adjust your portfolio based on your objectives, which may change from time to time. The increasing popularity of robo-advice raises the question of whether human advisors face extinction.

Moreover, in the past months, face-to-face transactions have been discouraged due to the COVID-19 pandemic, which has given rise to robo-advisors.

It has also been said that robo-advisors are less expensive than traditional advisors. Typically, financial advisors charge 2–3% (or more) of your portfolio’s value, while robo-advisors usually charge less than 1%.

However, their low, up-front prices come with lower quality. Robo-advisors lack an irreplaceable human element, which prevents them from providing the essential services characteristic of conventional financial advisors. Unlike robo-advisors, a financial advisor is able to show empathy, which is something you might need when dealing with money matters.

The rise of robo-advisors in Singapore

In the last decade of underperforming ETFs and falling commodity prices, robo-advisory has quickly gained popularity. Today, there are more than ten robo-advisor platforms in Singapore.

Large investment funds are implementing robo-advisory technology as the efficiency of automated portfolio management promises higher return rates than old-fashioned alternatives. As a result, firms that offer the same technology are becoming popular.

For example, MAS-licensed digital wealth manager Syfe can create personalized, professionally managed portfolios with their mobile and web applications within minutes. Syfe’s wealth advisors promise to provide an intuitive investing experience that is low cost and hassle-free. Another popular player in the industry is StashAway, which is also licensed by MAS.

Before Syfe came onto the market, the robo-advisory sector in Singapore was dominated by three players—AutoWealth, Stashaway, and the now-defunct Smartly—the three are sometimes abbreviated as “ASS.”

Smartly cited intense competition in the digital investment advisory space and maintaining high service standards as challenges in sustaining the business.

They may have a place for beginner investors

Robo-advisors fit investors who are just starting out and millennials who are more tech-savvy. Due to its low cost, robo-advisory appeals to undergraduates or fresh graduates who don’t have a lot of capital but wish to start investing early.

Robo-advisors fill a gap in the market by bringing low-cost, diversified investing with automatic rebalancing and tax-loss harvesting to investors who have SGD 1,000–10,000 to manage. However, as the investment sum gets larger and portfolios become more complex, human financial planners need to step in. As mentioned, robo-advisor technology still needs hands-on human intervention.

If you are a passive investor, a robo-advisor might be all you need. Meetups with financial advisors to perform checks on your financial health and investments, whether physical or virtual, can be too time-consuming if you are not that committed. Therefore, a robo-advisor that automatically rebalances or adjusts your portfolio will be suitable for you.

However, if you are a more active and serious investor, then a financial advisor might be a better choice, as they should be able to answer your questions and give context. Singaporeans must still seek professional advice when they choose to invest their money in complex financial products such as life and non-life insurance, mortgage, and investments.

This article was originally published by Vulcan Post


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