Learning Resources

Best Robo Advisors: What Should You Look For?

04 Feb 2022


Best Robo Advisors | Money Money Home | VI

Many times we've met people who say they want to make more money and start investing, but when asked how they plan to do so, all they can come up with is, "Well I heard on the news stock XYZ is good now." Zero understanding or knowledge whatsoever!

There is, however, a great solution that has come up more than a decade ago, at the height of the 2008 Lehman Brothers crisis, known as robo-advisory.

And now, a lot of people are just searching for the best robo-advisors instead of doing investing themselves.

Robo advisory defined

The definition of investing is putting money in something valuable so it will grow in value over time.

So if you're just investing in something just because you "heard” it's good, without knowing how valuable it actually is, that's not investing. That's just speculating based on market noise.

It would also be too expensive for most to hire a portfolio manager for their personal investments unless you are one of the rich and affluent.

Enter robo-advisory.

It is exactly what it sounds like – a robot providing you advice for your investments. And because it is automated based on an algorithm, not a human, this can be done on a massive scale for many people at one time, making it more affordable. A human advisor who needs to split his time in a day among his clients charges a higher fee for his time.

Robo advisory takes the money you've put in and distributes them among various investing instruments or stocks based on the criteria and risk appetite you've submitted earlier, just like a human portfolio manager would, so you can just kick back.

You don't need to do your homework, and everything is handled by a professional.

See also: Financial Advice: Why pay if you can get it free?

Choosing the best robo-advisors

With the trend catching on and people looking for avenues to grow their income, more and more robo-advisors are now popping up. This then creates the question, which are the best robo-advisors out there?

Well... like human portfolio managers, there is no "best one," just those that are suitable for you. No hard and fast rules.

So the next time you want to engage a robo-advisor, consider these factors:

1. People

Be it a business, a product, or service, the first thing you should always look at first are the people behind it, i.e., the management team and founders.

The values of its founders and the people managing it would always be reflected in a product.

A founder who has an appetite for "high risk high return" investments? The algorithm around the robo-advisor would also revolve around the "high risk high return" principle.

A conservative founder who believes in safe and long-term investments? The robo-advisor is also most likely built to invest in less risky stocks and get profits in the long run.

Checking out the management team and founders also provides an insight into their credentials, if they are actually qualified to be giving investment advice to people and to ensure that they are not a fly-by-night company.

2. Strategies

After confirming that the management team and their credentials are legit, we take a look at their investment strategies.

We've mentioned above that the founders' mindset will most likely be reflected all over the platform and algorithm. This is fair, as everyone has strategies that work for them. The question you should ask yourself is, will it work for YOU?

Imagine being a conservative investor who prefers low-risk investments but engaging a robo-advisor that uses adventurous investment strategies you don't understand. Wouldn't you be uncomfortable leaving your money with them?

Conversely, if you're an investor who believes in "high risk high return" or "go big or go home," engaging a robo-advisor that practises these strategies would make perfect sense.

The key is to always find one that meets your needs.

3. Fees

Robo advisors are priced lower than an actual human portfolio manager, that's what makes them such a popular choice.

That said, it is still important to compare your options between the different robo-advisors in terms of price, low as they are.

Different companies have different pricing structures, and similar to the strategies, it is important to choose one that works for your budget.

Remember to also check closely for any hidden charges.

4. Stamp of Approval

Finally, to ensure the legitimacy of this financial institution you're about to hand over your money to, check if they're licensed.

In Singapore's case, it is considered relatively safe if a financial institution is licensed by the Monetary Authority of Singapore (MAS). Otherwise, we don't recommend you engage them just yet or at all until they have it.

With your hard-earned money at stake, one can never be too careful. 

A great solution for people who want to invest, but don't really know how, robo-advisory has made it easier for many people to grow their income over the last decade.

That said, it is not without risks.

Robo advisors are fully automated, so in the event of a sudden market crash for any investment products, human intervention would not be possible for now. All you can do is watch the numbers decimate as it happens.

See also: How Investors Can Make Money in a Bear Market

The products on these platforms are also not tailored uniquely to you, you're only matched to one that is closest to your needs. Think of them as clothing from a fast-fashion outlet, unlike clothing tailored to your measurements.

After all this search for the best robo-advisors, remember to also ask yourself "do I need a robo-advisor or do I want to make use of my investment knowledge and invest on my own?" Who knows, you just might do better.

See also: Why You Need a Robo Portfolio in the Post-COVID World

Learn more about robo-advisory. Watch this Money Money Home episode featuring Sharon Au and Darren Lim.

Money Money Home | VI

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This article and its contents are provided for information purposes only and do not constitute a recommendation to purchase or sell securities of any of the companies or investments herein described. It is not intended to amount to financial advice on which you should rely.

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