The Rise Of Robo Advisors In Malaysia, A Beginner’s Investing Guide
No doubt both robo-advisor and robo-advisory are the latest buzzwords in Malaysia’s financial services landscape. It comes as no surprise to me that it has now become the talk of the town.
In 2017, Securities Commission Malaysia (SC) introduced a regulatory framework to facilitate Digital Investment Management services. The framework sets out the licensing requirements for offering automated fund management services to investors.
For Malaysians, we don’t have to look further than our neighbour down south in Singapore for the inroads made by robo-advisors in recent years. A simple search online for robo-advisors in Singapore will turn up more than a handful of key players, some locally-based while others are regional providers.
While some are offshoots of licensed fund managers and established wealth management firms, there are also those that came on the scene solely as licensed digital financial advisors.
Among them are Singapore’s own Smartly Pte Ltd, as well as India’s Valuefy Solutions and Main Street Capital Sdn Bhd which are among robo-advisors currently operating in the island state who are reportedly looking to expand up north to Malaysia. StashAway, headquartered in Singapore, is the first robo-advisor to provide robo-advisory services in Malaysia. It has launched its robo-advisory platform in November this year after obtaining a Digital Investment Management License as approved by the SC.
If the news fails to excite you, it means that you’ve not learned enough about robo-advisors or robo-advisory services. It’s indisputable that this is one of the biggest breakthroughs in financial services industry. It has gained traction worldwide at an exponential pace for the past decade.
What is a robo-advisor?
Before giving you a deep dive on the topic of the day, what exactly is a robo-advisor? As the name implies, clearly everyone can give a rough guess that there’s an element of robotics.
In layman’s terms, basically a robo-advisor refers to an application of algorithms in providing financial planning or investment management services to the investors with minimal human intervention.
To put it simply, imagine that you were once talking to your personal financial advisor face-to-face. Your advisor would tailor a personal financial plan to cater to your needs based on your financial situation and financial goal.
All these are virtually non-existent if you are using a robo-advisor. But it still gives you the same desired outcome by just dealing with your own laptop screen.
How does it work?
Robo-advisors can be as good as human financial advisors. They replicate what human financial advisors can do at the basic level, but at a larger scale. Robo-advisors provide primary financial advice to investors in respect of asset portfolio allocation.
It can select investments, allocate and re-balance an investment portfolio automatically based on clients’ risk preferences and financial goals.
Robo-advisors also gather client information through online questionnaires without any human interaction.
What are the benefits?
The robo-advisory industry has grown rapidly since the emergence of
Betterment in 2008, the very first robo-advisor in the world. According to Statista, assets under management in the robo-advisory industry amount to US$398 billion in 2018. And the segment is expected to increase with a compound annual growth rate (CAGR) of 38.2% to reach US$1.5 trillion by 2022.
There are questions that may float through your mind now. “Why is using a robo-advisor so captivating?” “What are the benefits of using a robo-advisor?”
Here are the 4 key benefits of using a robo-advisor to manage your investment portfolio.
1. Low fees
In the past decades, professional financial advice has always been accessible only to sophisticated investors or high-net-worth individuals due to hefty fees.
The most irresistible competitive advantage for using a robo-advisor is the low fee charge.
The fee is significantly lower as compared to getting a personal financial advisor. Yet, your investment portfolio is professionally managed.
Many robo-advisors in the market today have 0% sales fees with annual fees ranging from 0.5 to 1%. For example, StashAway charges a management fee annually which range from only 0.2% – 0.8% in Malaysia.
For the entry-level investor, a robo-advisor is much more cost-efficient as it cuts out the middleman, making it affordable to everyone.
2. Low entry requirement
Further, robo advisors generally have lower entry requirements across the industry.
Until recently in Southeast Asia, the use of wealth management services remained the privilege of the high net worth individuals who had a few hundred thousand in US dollar denominated currency to spare.
These personalised financial advisory services were certainly not available to those looking to invest a few thousand or even a few hundred ringgit until the advent of digitalised wealth management services.
For example, StashAway doesn’t require a minimum balance for investors to start investing in Malaysia while Smartly allows users in Singapore to invest as little as S$50 per month, even in Exchange Traded Funds (ETFs) globally which were previously off limits to small investors.
As most Malaysians know too well, if you wish to engage a certified financial planner, your request may be rejected if it doesn’t meet a minimum threshold.
At the end of the day, it’s your money that does the talking when it comes to robo-advisors.
3. No specialised financial knowledge required
Conceptually, a robo-advisor uses artificial intelligence to manage an investment portfolio. The robo-advisor mimics the way a human thinks and acts under different circumstances using artificial intelligence.
To make it more interesting, a robo-advisor commonly applies Modern Portfolio Theory. The objective is to maximise the expected return for a specified level of risk even though it’s continuously evolving with more advanced theories and data.
Does it all sound completely alien to you with all the technical jargon? It doesn’t seem to be a selling point to use a robo-advisor.
But, wait a second. Do you know how an airplane works before you board a plane to travel to your next destination?
That’s exactly my point. Any mom-and-pop investor on the street can start using a robo-advisor with just a click of a few buttons. All it matters is whether the robo-advisor that you’re using has a proven investment strategy.
You can easily benchmark its historical returns against other investment alternatives. Alternatively, use a backtesting approach to assess the reliability of the robo-advisor.
4. No emotions
“Let’s wait until the stock price rebound, it won’t go down further.” Sounds familiar? The costliest mistake that investors often make is hoping for a miracle to happen.
Investors tend to get anxious during a stock market crash. They can also get too excited during a bull market. That’s how a knee jerk reaction always happen in the stock market.
“Avoid the market noise and focus on your long-term goal.” It’s always easier said than done. Especially for those who can get weak at their knees easily.
This is a perfect situation why a robo-advisor comes into play. The investment process is fully automated when you use a robo-advisor.
It follows preset rules and doesn’t allow human emotions to cloud its judgement to affect decision-making. Meanwhile, you can continue to eat popcorn while enjoying Netflix on your couch.
Which suits you needs better?
No doubt the advent of robo advisors benefit many novice investors especially the millennials. The rise of robo-advisory is regarded as a watershed moment for the investment management industry in Malaysia. It’s unavoidable that the use of robo-advisors will transform the traditional fund management services in Malaysia in years to come.
Certainly, the incumbent capital market players must step up their game to avoid losing competitiveness to robo-advisory firms.
Of course, there’s no one-size fits all investment. And there’s no risk-free investment. You may take it with a pinch of salt.
More importantly, do not limit your options before sparing a few minutes to understand how a robo-advisor can benefit you as an investor.