Source: Dollars & Sense
Above table obtained from Dollars & Sense is a simple snapshot of how Robo-Advisors charge their fees from investors. However, is that all to the story?

Let's visit their websites, and take a look at their recommended portfolios!
We know Robo-advisors recommend ETFs to you, but what ETFs do they put into the Portfolio?
For comparison sake, all below portfolios are 'Aggressive' in nature.

1. Stashaway recommended portfolio
Source: Stashaway Agressive Portfolio from Financial Horse
2. AutoWealth recommended portfolio
Source: AutoWealth recommended portfolio

3. Smartly recommended portfolio
Source: Smartly recommended portfolio
Variety
Stashaway carries the largest variety of holdings. It even has equities in Real Estate and Technology. The other 2 pales in comparison, with only 6 ETFs compared to Stashaway with 8 ETF holdings.

Only Stashaway and Smartly offers a little hedging component through GLD - Gold.

Growth & Volatility
I would say Stashaway offers the most growth potential. It will also has volatility as it is vested in Technology. This is obvious given recent price shocks in Facebook, Apple and Amazon shares.

Next, AutoWealth is well diversified in terms of Equities too. Smartly seems to be vested much in Developed markets only, where more than 60% are in safe ETFs - Developed Market Stocks ETF and Dividend Stocks ETF.

Expense Ratio of ETFs
Surely, you can guess which Robo-advisor has the highest expense ratios in its portfolio.

I would say it has to be Stashaway. Followed by Smartly, and then AutoWealth.
Stashaway has 14% in CWB with 0.40% expense ratio, and 14% in AAXJ which has an expense ratio of 0.67%.

Expense ratio is the annual fee paid to ETF companies to maintain the operations of the ETF itself. And, sadly, it is not covered by the 0.5-1% annual management fee you pay to Robo-Advisors.


Real Fees you pay to Robo-Advisors

I have applied estimated Expense ratios to the 3 Robo-Advisor portfolios. Below table is a picture of the real fees you pay to Robo-Advisors.

I have included a Low-Fee Unit Trust that tracks S&P 500 index for comparison.

Point: If you wish to do a Regular Savings Plan, doing so with Unit Trust is not necessarily alot more expensive compared to Robo-Advisors. Please see Real Fees which includes also Expense Ratio of ETF holdings.

Source: Robo Advisor websites + FSM platform
Source: Smartly website - It declares an average Expense Ratio of  0.16%.

Over-Declared Fees of Unit Trust in Returns Projection

As part of marketing efforts, Robo-Advisors are always compared to Unit Trusts. I still feel they are essentially very different. 

Unit Trusts are managed by Fund Managers who are to free to invest in anything that fits the Investment objective. Robo-Advisors has a more narrow scope of investments that they can make. Often, they are vested in Vanguard ETFs that boasts of their extremely low annual expense ratio.

Below table shows that a Robo-advisor portfolio will yield you close to $600,000 more than a Unit Trust portfolio.

Point: They have conveniently assumed 6% annual returns. This certainly does not happen all the time. And, Unit Trusts, if purchased through DollarDex or FSM, does not have an Average Annual Fee of 2.7%. Definitely not even 2% for Llama Portfolio.

Source: Stashaway website

Paying Withholding taxes when US Based ETFs pays out Dividends

Non-US residents are required to pay 30% withholding tax on Dividends by US Based ETFs. Robo-Advisor portfolios are largely made of US ETFs.


2-year Annualized returns of S&P 500 (tracked through Infinity US 500) vs Other US Equity Unit Trusts

Source: FSM > Fund Selector
I have sorted and only selected US Equity Funds with the lowest Expense Ratios and largest Fund sizes. Well, even with higher expense ratios, we can see that 3 out of 6 Unit Trust has managed to beat the Index in a 2-year period.

Point: It is possible for Unit Trust to beat the market. It really depends on your Investment Strategy.
Source: FSM > Fund Selector
Similar results seen for a returns in the past 1 year.


Is Robo-Advisor for you?

Robo-advisor is good for people who prefer a hands-free investment style. However, I feel that since there are competition among Robo-advisors, each offering a portfolio of different style to you, you will have to do your due-diligence in choosing the suitable one for yourself.

And since you are going to do some homework, I say you might as well manage your own investments? 

It is still a better investment component of your finances, compared to Endowment plans or Investment-linked policies, which charges outrageous Sales Charges. Endowment has its downsides like being unable to withdraw funds, and having a low 3-4% returns per year.

However, I will suggest that you consider concept of Dollar-Cost Averaging too. Robo-advisors work like a Regular Savings Plan with a monthly amount. It will be beneficial to intervene manually to increase monthly investments during periods of market downturns. This is one way to enhance Returns in the long-term.

Either way, to have proper and good returns, you are going to have to do some manual work too. There is really no free lunch on Earth.

Definitely, if you have a large sum of say $100,000 and above, I highly suggest you manage your own portfolio. You will have no issues averaging down too, as you are able to hit $5,000 in each trade, thus making full use of brokerage fees in Singapore.

Hence, Robo-Advisors is most suitable for Young adults with low initial capital. Good for setting Savings Goals, but, not for the long-term.








3 Comments

  1. Frankly in real world terms, most long term investors will do well as long as they stay away from ILPs & par insurance, and invest in broadly diversified manner, whether be it individual stocks, UTs, ETFs or robo-advisors.

    Yes, 1%-1.5% difference in costs may result in difference of $300K thirty-forty years down the road (out of a total portfolio of say $1.5M).

    But the biggest differentiating factor is human emotion or psychology.

    Even if you invest in 0% fee ETFs (there are some in US), if you do dumb things like (1) stop investing when markets drop -20%, -30%, -40%, -50% or (2) sell during bear markets or (3) flip-flopping between different stocks / products based on what is hot or (4) de-risk after your portfolio & markets have already dropped -30%, -50%, etc etc ...

    ... then you'll perform even worse than the guy who bought the high priced endowment and whole life plan with 4% internal expense ratios.

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    Replies
    1. Agree that psychology is the biggest factor in investing!

      Has to stick to a certain strategy and be rational 😉

      Thanks for this reminder, will be useful come 1st march, when us china trade deal is announced!

      Delete
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