So, this article came out, which was fun.
I have to say...I can’t imagine if someone wrote something like:
‘Money Maverick Review: Should You Invest with this Financial Planner?’
That would be terrifying.
It was a pretty well researched article, with some iffy conclusions without substantiation here and there – not perfect, but stated to be personal opinion and undeniably well researched. You can read it above, but some of the main points were simple:
1) Most people no little about how a Robo truly works, but invest anyway
2) Opinions on the investment components of Stashaway
3) Concluding that balanced returns were decent, while higher returns were possible
For the title, I felt that it could also have covered some of the less technical aspects.
Maybe it will be interesting to you from a Financial Consultant’s point of view.
Why Robos Work
One of the easiest reasons why Robos work is because the interface is extremely friendly.
From a quick glance, you can tell how much you invested in, in what funds, and what kind of result you’re getting at the moment.
The information and terms are also condensed and kept simple. Despite not necessarily understanding the mechanics behind it, a 12 year old could read an understand it.
Many beginner investors understand investing simply by the following steps: 1) Investing beats inflation.
2) My money gets invested.
3) I see results.
Most people are not genuinely interested in the how-to between Step 1 and 3. By keeping it simple and interface friendly, there isn't a lot of need to know the how-to if there are favorable results in the short term, or that there is movement in the day to day.
On the traditional end, most account openings tend to come with a lot more terms and conditions for paper and online contracts. Some of it could be mitigated, bringing us to the next point -
The traditional end is working on this, but most platforms are relegated to a browser link. While a personal account is good, a personal app is even better - faster and more convenient access that is couple with literal accessibility to one's funds.
Speaking from experience, people get frustrated with browser accounts. Which is easier - having an app you forgot about but is always on your phone, or a browser which you (should) access infrequently where you may not have saved your user password?
With accessibility comes...
As an investor and consultant who's managing a lot of people's money at this point - it's very hard for me not to objectively see liquidity as a net minus. The Dalbar Studies are absolutely clear on this - and trends haven't changed. People who have easy access to their investments sell low and buy high. If anything, they've gotten worse with the rise of highly liquid instruments that can be traded like stocks.
But objectively, I can also see the potential appeal towards the exceptional DIY investors, who are familiar with entry and exiting strategies.
There is a decent amount of upwards fluctuation across periods as short as a month, let alone within the day itself.
Since investments move upwards 2/3rds of the time, it's not unreasonable to expect favorable exits at specific points of the day compared to exiting at the end of the day (with some Traditional Investments).
There is ironically, a sense of security in a mostly liquid instrument - which makes Robos very appealing.
Robos continue to tout their investments as low costs, especially since they typically use low cost instruments such as ETFs.
For the most part - while the comparison between Traditional Advisor fees and Robos are usually wildly exaggerated [most traditional investment fees are either negotiable or mitigated through a favorable structure]- Robos are consistently low on fees, while the range of fees tends to be much higher on the Traditional End.
In the case of a Robo, it tends to be standardized (e.g. flat 0.5% recurring) or decreases with Assets Under Management (e.g. <$100,000 is 0.8%, and $2mil > 0.2%).
I'm not sure how I feel about that, but your Financial Consultant tends to have a wider and more subjective range. For example, if a client has a particularly difficult goal and the asset allocation required much more careful planning and subsequent work on my part, I tend to charge or negotiate higher fees.
Similarly, if the client is extremely old or has less use for my service/more autonomous, I tend to charge a lot lower. If I under-perform certain expectations, I also tend to lower fees.
Of course, what should be an advantage to clients (variability of fees) tends to be a disadvantage since it doesn't come across as very transparent.
Why Robos Don’t Work
1) Ambiguous Track Record and Future
For the most part, Robos are still ‘new’.
This leads to lack of a track record, which is another risk that needs to be accounted for experienced investors, as well as a generally lack of understanding as to how the investments are done with the proprietary algorithms alongside the human factor.
It wouldn't be unreasonable to expect such a scaling model to fail entirely with fierce competition, which is actually a problem that smaller ETFs face.
If you have a team of 5 and you manage $50 Million Dollars, but you're charging 0.5%, it's a gross $250,000 across business expenses and 5 people. Not a pretty picture.
But well, DollarDex and FSM are still alive, so there’s clearly a profitable market for everyone.
2) Yield, or Risk
I talked briefly about this in a previous article, but for proponents who still don’t buy what I’m saying, the reality is that the history of low-risk positioning doesn’t have historically high yields if you look at 1) Components (e.g. SNP500, Barclays Bond Index) and 2) Beginner Asset Allocation [e..g. 60% stocks 40% bonds]
No one is denying that they could have high risk-reward ratios or Sharpe Ratios, but that can be a completely different story from Absolute Returns.
Comparatively, through a Financial Consultant you can have access to these funds…
…Or these kinds of results.
3) Lack of Coaching… And Advice!
Some of this is subverted by self-proclaimed Bionic Advisors, which is a term that’s becoming looser and looser recently (through no fault of MoneyOwl but chatter from the internet and other advisory agencies) – where you have investments through simplified and systematic ‘Robo’ platforms but the coaching of a human consultant.
For the most part though – a Robo is an advisor only in the sense it tells you what to do and you can choose to follow through or not.
Otherwise, it lacks things that a Traditional Consultant can and should do for you:
● Regular review of strategic asset allocation, in case of major strategic shifts that affect fundamental investing assumptions. Some examples can be read here under Takeaway 5.
● Execution of buy and sell, or strategies and rationale behind it.
● Re-balancing at regular intervals to asset allocation
● Risk coaching of investor to stay invested during turbulent markets
While I took the time out to point out the weaknesses of Robos, some things stand with me.
HIGH CLIENT SATISFACTION: First of all, the user experience that Robos provide is really advanced, and anyone - beginner or experienced alike - would enjoy it more.
NARROWED WEAKNESSES AND OWNERSHIP: Secondly, many weaknesses behind Robos are subverted when you consider their structure of asset allocation. Answering a standard set of questions with hundreds of unique combinations results in ownership of your investment, regardless of outcome.
That brings me to a third point, DEPENDENT SKILL FACTOR - where Traditional Recommendations interacting with a human tend to suggest a performance factor.
It's the same for all areas of Financial Advisory - investing or otherwise - not all Financial Consultants are equal.
While most humans are supported by investment agencies and fund houses, the absolute returns can be hindered by a human advisor rather than a help.
After a few years of managing the weight of client money and outperforming benchmarks - let alone a mix like Robos with much lower yields than the SNP500 - I'm personally confident in my own skill.
But it hasn't been without bumps.
There are strengths and weaknesses to both types of Advisors, ultimately. But now an element of choosing a good Traditional Consultant is required.
Robos don't need you to have that element. And instead of picking between Advisors with different methodologies or strengths, sometimes a client will pick Robos - uncomplicated, standardized and user friendly. And that's how they steal my business.
With SPIVA and Vanguard studies suggesting that human involvement should be minimized on both fund management and financial advisory...Robos feel like they have a clean slate, compared to an exceptional, but highly prolific history of Traditional Advisory screw ups.
Are these feelings justified?
God knows. I'm not sure, and not nearly enough time has passed to figure that out.
But I'm always ready to help my clients smash the competition.
As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.
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Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.
The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.
Here are some of my resources on:
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4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)
5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy
6) Financial Optimisation: How I Avoid the Largest 'Fees' of All
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