Are you a retail investor? Are you aware of all the investment options available to you in Singapore? What do you know about the new financial innovation called robo-advisory? I posed this exact question to my advanced research paper survey respondents in Singapore. I am a wealth manager, graduating next month and starting my career in the financial advisory industry which is getting tremendously disrupted by financial technology a.k.a., fintech. Instead of fighting the change, I decided to embrace it and learn first-hand about why retail investors like you increasingly prefer robo-advisory services and what robos’ capabilities are particularly attractive.
This article’s purpose is threefold: first, raise awareness about robo-advisors as a cost effective investment option with the larger investment public in Singapore; second, discuss selected outcomes of my research around the type of investors that are considering robo-advisory solutions; and third, launch a series of articles on robo-advisory product offerings, features & capabilities, and rankings.
Retail Investors Options
So you have been working hard and saved up a fair bit. Your cash is sitting in your bank account, earning you 0.5% per year. You want to invest it with return of 1-2% above average Singapore inflation rate of 2.6%. You might have studied finance before, but you neither follow the markets nor have the time to research investment products.
As a retail investor, by default, you are limited to what investment products you can actually buy. This is partially due to stricter regulation in some markets, partially due to minimal investment funds you have at your disposal and partially due to high cost of professional financial advice. The options that are available to you in Singapore are expensive and usually generate below inflation rate returns.
For example, the most common retail investors’ choices in Singapore[1] are purchasing unit trusts or various types of investment linked and endowment insurance policies dubbed as “savings and investment plans” or acquiring structured retail investment products with low total returns, but guaranteed principle or buying common shares in publicly listed companies. As a retail investor in Singapore, you do not need any investment education or experience to open a brokerage account and start trading publicly listed stocks.
What’s wrong with these options? Banks’ selling commissions for unit trusts range from 0.88% to 3-4%, depending on the fund and the bank. ILPs have a myriad of commissions, ranging from fund switching charges (0.5%) to fund management fees (1-3%). Endowment plans and structured retail investment products return below inflation rate p. a. in the current low interest rate environment.
Finally, a much riskier, but higher return option, is a direct investment in the Singapore stock market, where you are exposed to individual equity risk with 1 in 4 Singapore stocks having their risk above the average market level. See the screenshot from Bloomberg Equity Screener below, showcasing the number of common shares with their beta above FTSE Straits Times Index (199 out of 753 stocks or overall 26%)[2].
Exchange traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETF’s stated investment objective.
An ETF typically aims to produce a return that tracks or replicates a specific index such as a stock or commodity index. Such index tracking ETFs are passively managed by ETF managers and do not try to outperform the underlying index. Hence, index tracking ETFs have fees and charges that are usually lower than those of actively managed investment funds. (Money Sense, 2017)
However, if you are such an investor in Singapore, you will have to meet certain investment knowledge and experience criteria in order to qualify to purchase individual ETFs. (Money Sense, 2017)
So, the options are: on one hand, buying expensive investment products from retail banks and insurance companies and on the other, potentially exposing yourself to above market risk. In this situation, what other investment options do you, as a Singapore retail investor, have available? Wait until you have S$200-350K in investable assets and access to a relationship manager with one of the banks? What does an investor do before this happens?
IS ROBO-ADVISOR AN OPTION?
Robo-advisors (Deloitte, 2016) provide online portfolio management services which aim to invest clients’ assets by automating client advisory. They routinely invest in one of the several model portfolios, which are made up of a mix of low-cost exchange-traded index funds (ETFs) and on average charge 1% or less in fees (Collins Margaret, 2016).
Can robos be your answer? When you buy a single stock index ETF, you are exposed to the total risk of that stock market. When several ETFs are combined in a model portfolio by a robo-advisor, they are no longer as risky as the total market. Robos with their efficient frontier calculation algorithms and multi asset allocation strategy achieve just that – total risk reduction and diversification compared to individual stocks purchases.
However, although robos are consistent in applying the Nobel Prize award winning formula of efficient frontier portfolio and run algorithms to make decisions about your portfolio allocation, their systems are as good as the developers that worked on them. Moreover, robos rose to popularity during the bull market and nobody can predict how algorithms will handle severe crisis or prolonged economic recession. To add on to that, even most robos have introduced on demand financial advisors you can call, their business model is based on low individual touch with investors, thus it’s challenging for them to handle calls from disgruntled clients shall an emergency occur. Nonetheless, robo-advisors are increasingly gaining popularity with young mass affluent clients due to their extreme low cost.
Why then, based on the survey I recently ran for robo-advisory service offering with Singapore based respondents, are robo-advisors largely unknown to the Singapore retail investment public? When asked what you know about robo-advisory solutions, about 57% of respondents mentioned that they have never heard about them and have no idea what they do.
Image via YahooOne of the key reasons is, that perhaps none of the robo-advisor start-ups in Singapore has gained retail funds management license to actually start delivering the service. Another reason is, that in countries like USA, the UK and Australia, where robos with the largest Assets Under Management (AUM) amounts are based in, individual pension funds can be invested with robo-advisors, whilst in Singapore, CPF and SRS accounts largely remain under tight control of the regulator.
Similarly with ETFs that took the market by storm in the recent years due to their cost effectiveness and ability to passively track almost all key asset classes, robo-advisors are taking on the traditional wealth management industry by offering lower account management fees for the standard portfolio construction and monitoring services with financial industry equivalent investment performance and risk.
HIGHLIGHTS OF RESEARCH
Image via EYInterestingly enough, my Singapore retail investors’ survey numbers are in line with an online survey conducted last year among 632 individuals who shopped for a brokerage account in the US. It showed that 57% of total brokerage shoppers were not aware of robo-advisor offerings and only 1 in 7 had a robo account. (Masters, 2016). Based on my survey data, only 1 in 37 Singapore respondents had a robo account (foreigners included).
43% is the robo-advisory services awareness rate that I have received from my Singapore survey. This is somewhere in between North and Latin America rates, according to EY data (EY.com).
Overall, robo-advisors’ awareness and consideration for investment in Singapore can be found on the below two charts.
As you can see, younger respondents (25-34 age group) are both more aware of robo-advisory services (23%) and more likely to consider investing in them (9%).
My survey results are in line with LIMRA 2015 study of Gen Y, Gen X and Boomers in the US. (LifeHealth.com, 2015)
Image via lifehealth.comHowever, my data is showing that almost 50% of women respondents are considering investing with robos vs. only about 26% of men respondents planning to do so. This is not because women are more advanced in investments. On the contrary, most women have identified themselves as average retail investors.
Another rather interesting observation in my survey data is that there are two distinct respondent groups that are considering investing with robos: 1) Women with assets from S$0-60K with average retail investment experience; 2) Men with assets from S$350K to more than S$5 million with advanced retail investment experience and above.
I have not come across similar research results from US or any other market, where the same observation was highlighted. My data also does not explain the reasons behind such difference between two robo investor profiles. I might only speculate that women with minimal funds in Singapore are looking for cost effective and convenient methods to start their investment journey and are ready to risk minimal amounts with robo-advisors. As for men, it seems they are more willing to try robos with percentage from their larger funds and perhaps better understanding of the risks of such investment than women. It will be interesting to further explore women respondents to find more specific answers to why they are two times more interested in robo-advisors than men?
As we can see, Singapore is no different from the rest of the world in terms of respondents’ age and % of awareness and consideration for investing with robo-advisors. So it applies to Singapore too that in order to capture a piece of the robo-advisor market, robo players need to do a better job of building awareness of their robo-advising offerings and providing education around these services, after they actually obtain a license to operate, of course.
In my opinion the best approach is to tightly collaborate with the regulator (MAS fintech office) and structure a well-coordinated education & marketing campaign around standard benefits and risks of investing with robo-advisory platforms. Everyone will benefit with this approach: investors will be educated and informed of the risks, robo start-ups will capture a share of the market and regulators will be able to supervise the entire process.
Whilst at it, considering that half of women respondents expressed interest in investing with robo-advisors, robo players’ advertisement messaging can be customized to appeal to young professional women that do not have much experience investing in capital markets and for more wealthy male respondents with advanced retail investment experience, it probably makes more sense to position the message in a more sophisticated way.
SUMMARY:
My research tells me that young retail investors in Singapore are in need of more cost effective portfolio and investment management options that would allow them to reduce market risk exposure, but maintain that 1-2% above inflation rate of return. It seems that MAS is recognizing this need as it is now reviewing applications for retail funds management licenses from: Smartfolios, Stashaway, Smartly, and MissKaya.
Especially active in considering robo-advisors are young professional women with AUM below S$60K. MissKaya is spot on in terms of targeting this demographic in Singapore and also making financial education part of the solution as this segment has average retail investment experience and knowledge.
For wealthy male segment with advanced retail investment knowledge and experience, robos that are targeting accredited investors segment that is not as regulated as retail in Singapore, have already went live. Among them are Weinvest, Connect by CrossBridge, Eigencat and Bento by Mesitis.
What I have covered in this article are just selected insights from my research. In the series of articles that will follow I am planning to share more conclusions not only about investors interested in robo-advisory solutions, but also about specific robos’ features and capabilities that won investors’ trust around the world. To request the complete research report, please reach out directly.
I do hope this article has been useful in terms of elucidating some light on robo-advisory scene in Singapore and did offer some suggestions on how robo-advisory platforms can penetrate the market better as well as explained why robo-advisors introduction to retail investors in Singapore expands their investment options in a cost-effective way.
This article first appeared on Linkedin
Featured picture via Pixabay
