With the fintech landscape evolving rapidly over recent years, financial institutions and service providers are quick to adopt innovative solutions to offer better and more seamless services for their customers. One solution that is quickly becoming mainstream are robo-advisors, which is intended to simplify the investment process for the public, including both beginners and experienced investors.

Many Malaysians would have heard of or are actively using robo-advisors, and for good reason. If you’re looking to take your first step into investing, robo-advisors are a great platform to start. In this article, we’ll explain the basics of a robo-advisor and why they’re a suitable option for investment beginners.

What is a robo-advisor?

To begin, robo-advisors are wealth management platforms that also function as automated portfolio managers. They make use of advanced technology – including algorithms and big data analytics – to help you build and manage an investment portfolio based on your investing goals and risk tolerance.

Globally, robo-advisors have been around for a while; the first robo-advisor, Betterment, was launched in 2008 in the United States. In Malaysia, the first robo-advisor to obtain the required licence from the Securities Commission (SC) to operate is StashAway, back in 2018. Since then, more robo-advisors have emerged in the market.

How do robo-advisors work?

When you invest using robo-advisors, you are essentially investing in an “assorted package” of investments, instead of just one asset class (such as only in bonds, or equities, or commodities). In other words, you are buying into a mix of assets, often made up of some (or most) of the following:

• Shares and equities
• Properties/Real estate
• Bonds/Sukuk
• Cash
• Fixed Income
• Commodities

This list is, of course, non-exhaustive; there are various other assets that robo-advisors can dabble in as well. As such, a robo-advisor immediately meets one of the golden rules of investment: diversification.

When you start your investment journey with a robo-advisor, you will typically be requested to fill in a questionnaire to share some basic information. These include details like your age, income level, financial commitments and goals, and investment timeline. Based on the provided information, the robo-advisor will suggest to you a suitable risk appetite and an appropriate investment portfolio.

For instance, someone who has a higher level of risk appetite may be allocated a larger percentage of equity (stocks) in their portfolio compared to someone with a lower level of risk appetite. Some robo-advisors will also “unlock” the ability to create your own investment portfolio, should you wish to do so.

Benefits of investing with robo-advisors

Robo-advisors are rising to popularity for several reasons; as an alternative to traditional portfolio management, they offer certain advantages.

1. Affordability & Accessibility

A key advantage of robo-investors is its affordability. Robo-advisory platforms typically charge significantly lower management fees compared to traditional professionally managed investments such as unit trusts. For instance, StashAway lists its three fees (annual fee, expense ratio, and currency conversion fee) as below:

Meanwhile, the fees charged for traditional investment management could include one or a mix of the following direct and indirect charges: initial sales charge, management fee, trading commissions, withdrawal fee, and switching fee. Notably, the sales charge could fall between the range of 3% to 6%, whereas the annual management fee could come up to 2%. As these fees begin to stack up, the cost to invest can turn out to be quite hefty.

On top of that, robo-advisors also tend to have a lower minimum investment amount compared to traditional investment options. In fact, licensed robo-advisors in Malaysia only require you to commit a minimum placement ranging between RM5 to RM100 to kickstart your investment journey. This is in comparison with the minimum investment amount of RM1,000 that is sometimes needed for certain unit trust funds. Given this reduced entry requirement, robo-advisors make investing a lot more accessible to the public.

2. Automated Processes

Besides that, the automated investment process with robo-advisors also lowers the barrier of entry for beginners – there’s no need to do too much research and devise your investment strategy, because a robo-advisor would be able to do it for you through its risk assessment analysis.

Moreover, robo-advisors automatically rebalance and re-optimise your portfolio after certain periods to ensure that it still matches your financial goals and risk tolerance. These processes are crucial to cope with the fluctuating market value of certain assets due to economic shifts, which can then go on to change the risk-and-return profile of your portfolio. With these processes done for you, you do not need to monitor and rebalance your portfolio by yourself.

3. Emotion-Free

Some investors, especially the less experienced ones, can get easily influenced by market sentiments, causing them to sell during a downturn, or make reckless buy orders during a sudden market upsurge. These usually don’t end well, and can result in painful losses.

Robo-advisors stick to algorithms for all investment-related decisions, taking the emotion out of the process. For example, an unusual market correction (such as the one facing China’s tech stocks) will be seen as a buying opportunity for robo-advisors rather than a panic sell decision that individual investors may end up making.

4. Diversification & Global Market Exposure

As we’ve mentioned earlier, robo-advisors let you invest in a variety of products at one time, which means that your risk is managed efficiently. If a particular investment asset in your portfolio dips in performance, your losses can be cushioned by the profit made from other asset classes.

Aside from being able to diversify your asset classes, investing through robo-advisors can also give you exposure to other markets (geographical diversification), from the United States to various Asian regions. This is traditionally a costly and sometimes difficult process, but also an important investment strategy. Exposure to different markets allows investors to tap into higher-growth or mature markets for better returns, and mitigates any risk that could affect the local market.

A great first step into investing

The inherent nature of robo-advisors and their unique perks makes them a genuinely useful tool for modern investors, both new and seasoned. They offer “training wheels” to novice investors with portfolio recommendations that are tailored to their risk appetites, while allowing them to familiarise themselves with the world of investment.

Meanwhile, working adults who frequently use the excuse of not having enough time to invest can enjoy the benefits of a robo-advisor as well. Most, if not all platforms, offer standing instructions to deduct a fixed amount from your savings account every month, so you can “set and forget” your investment and make your money work for you. No more excuses!

As the largest robo-advisor in Southeast Asia, StashAway is the preferred option for most Malaysians looking to invest using a robo-advisor. Its stellar track record (up to 17.6% in annualised performance since its inception in 2017 to 2020) combined with affordable rates make it a solid option if you’re looking for a robo-advisor.

But there’s more! Thanks to our ongoing partnership with StashAway, we at RinggitPlus have an exclusive promo, just for our readers. Enjoy 50% off fees for the first RM100,000 invested for 6 months, no strings attached!

Ready to start investing with StashAway? Tap into our special deal and sign up for StashAway through this link.

• TAGS:
• Artificial Intelligence
• Betterment
• Longform
• RinggitPlus Partnerships
• Robo-Advisors
• Securities Commission Malaysia
• StashAway