In the era of technology and innovation, a robo advisor is a brilliant idea. It simplifies and automates the investment process at relatively low annual fees. Clients can easily and quickly invest in the market having neither control nor knowledge of what they are actually investing into. Let alone the multiple risks involved, such as currency risk, default risks, tax payments relating to dividends, capital gains and inheritance consideration for the next generation. It simplifies the process so much so that the client's life needs, risk profile and changing requirements are not necessarily taken into consideration. The robo advisor is in fact taking care only of investment, however a licensed financial consultant is taking care of understanding the client life goals and objectives, protection and retirement needs, investment and wealth accumulation requirements and manage the client's overall finance for a lifetime, not just on how to invest today. It is the ‘human’ element and personal touches that a robot simply cannot replace.
Everyone’s finances are not a simple question of quickly investing into the market but it is often a more complicated scenario that requires two individuals to discuss extensively both initially and of course to be reviewed and improved over the years. The same reasoning can apply to why a lawyer, dentist or CEO could not be replaced by a single algorithm that eliminates human interactions and discussions. I won’t even think about letting a robot advise me on heart surgery!
The argument for paying lower fees through a robo advisor is because it reduces the annual fees. Without looking at net performance, this does not necessarily actually add value. It can be true at first sight for just a simple investment, however let’s look at just dividend taxation - this already changes everything on its own. In Singapore, most robo advisor use low fee Exchange Traded Funds listed in the USA to invest globally. For a Singapore investor this means that a US witholding tax of 20% on income (read dividends) will be taken even when investing outside of the US, say for example in European and Asian stocks and bonds where dividend tax would not usually be due through other investment methods. Considering a bond portfolio with 6% annual dividend yield, this means the client is paying 1.2% tax every year. It is retained at source therefore the client would not be able to see it, but will receive only 4.8% dividend on those specific assets, before the fees charged by the roboadvisor. So one cannot simply look at just the robo adviser’s annual fees.
As you can see, just this one element can make a huge difference. Imagine the return differential of 1.2% per annum over the long run. If you are saving for a future event, say retirement, which could be in 20 years time, this 1.2% per annum would equate to reduced returns of 27%.
Clearly this is looking at just one angle, but illustrates one short fall of not seeking a human expert for advice. What if you were to move overseas into a more tax aggressive jurisdiction? Is the robo adviser going to be able to ensure you are set up tax efficiently? Yet another consideration that looks beyond just the annual fees.
Robo advisers do offer some people in certain scenarios a good platform to start saving. However if you are of a certain affluence, or have other international considerations, then it simply does not make sense. Saving on annual fees could become a very expensive mistake. Your financial future is of the utmost importance, and financial planning is extremely personal. Why jeopardise your family’s long term financial goals, without seeking a second opinion. (I mean from a human, not another robot!). For a complete analysis of a person's needs, a financially savy individual is needed to talk to, rather than an automated website investing into the same assets for everyone regardless.
For a complete financial discussion feel free to get in touch with Principal Consultant Andrea De Grazia.
Author: Andrea De Grazia, Principal Consultant
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PLEASE NOTE: IPP Financial Advisers Pte Ltd is a licensed financial Adviser and neither the company, nor it's representatives, are tax advisers.
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