MALAYSIA’S first robo-advisor was launched in 2018 through the Securities Commission’s (SC) Digital Investment Manager (DIM) framework.
The framework gave robo-advisors access to qualify for a fund management license as long as certain financial and operational criteria was met as well as their tech component forming a clear value proposition for retail investors.
Introducing technology enabled platforms to manage wealth has certainly reduced costs, increased convenience and opened up global portfolios to many.
There are now eight firms licensed through the DIM framework which has added to the vibrancy of the funds management industry as well as increased choices for investors. As robo-advisors are relatively commonplace several persistent myths have formed which I hope to address.
- Myth 1: Robo-advisors are here to replace financial planners
The term “robo-advisor” was a moniker inherited from the US pioneers like Betterment and Wealthfront which looked to combine Exchange Traded Funds (ETFs) with a slick user interface to manage wealth at low cost.
These firms now manage over $US20 bil each and have inspired many firms globally to replicate this model.
Naturally, financial planners do not take kindly to this term as they have spent years building a practice based on intimate relationships and trust.
An investor’s robo-advisor journey begins with some automated guidance on what portfolio they should select based on their risk profile or investment objective.
A simple example would be how an aggressive portfolio would be recommended if a user wants to invest for their retirement 20 years away.
This of course is no substitute to the user considering their overall financial position; the current asset allocation of their existing investments, their leverage and debt service capability, tax footprint, cash flow management, not to mention insurance and estate planning.
In reality, robo-advisors more closely resemble fund managers or unit trust companies as success is measured by assets under management (AUM) with management fees charged to grow these portfolios.
There is a gap in the product offering landscape where passive investing and global exposure is concerned. If financial planners and users look beyond the label, they should see if they value the service, and apply it to best serve their practice or personal situation.
- Myth 2: Robo-advisors use AI to completely avoid investment losses
Terms like machine learning and artificial intelligence (AI) get bandied about almost as if the mere mentioning of these terms should impress investors.
When investing, one should cut through the jargon to truly understand the investment philosophy of the fund manager and investment exposure.
These terms bring up the best and worst expectations in investors’ minds. I have faced questions like “Will your AI be able to predict market crashes and save me from investment losses?” or “Will your algorithm go haywire and buy loss making investments by mistake?”
As true application of autonomous AI for wealth management is still not available especially outside proprietary trading, one is mistaken for thinking that robo-advisors have incorporated such technology into their investment process.
While robo-advisors do use technology within their investment process, it can best be described as systematic investing.
Investment decision making is pre-determined given certain circumstances whether it be economic data or financial market indicators. While it seems simple or intuitive – eg buy bonds in a recession – the problem requires automating when multiple asset classes are considered and how the portfolios will look like across the risk spectrum.
Technology is also important in risk management, finding valuation gaps or accounting for FX (foreign exchange) exposure.
All this data is fed into a model which recommends an optimal portfolio. This output is reviewed and monitored by an investment committee which also means there is a human layer between the investment model (the robot) and actual exposure to the market.
- Myth 3: Robo-advisors are only suitable for millennials
Using tech to reduce costs and increase convenience for wealth management does come with its drawbacks.
Our mobile phone where we turn to for entertainment and online shopping did not get the same trust factor as a brick building or a firm handshake especially in the early days.
People do wonder if their funds are truly safe or if the investment strategy is child’s play.
While robo-advisors appeal to a relatively young and upward mobile demographic – probably somewhere in the early to mid-30s – it is wise to address the concerns of those in their 40s and 50s who are steadily experimenting robo-advisory.
Robo-advisors regulated by the Securities Commission (SC) need to use a trust account to segregate investment funds from the fund manager’s working capital for safety.
Audits and reporting checks are conducted regularly to ensure the security of those funds. Robo-advisors also typically offer global exposure – something which is relatively novel considering most local unit trust companies are local or regional experts.
One solution is feeder funds to other global fund managers although layers of fees do apply. If investors are looking for an affordable way to diversify globally, robo-advisors are a good avenue to do just that.
Conclusion
All things considered, Malaysians have embraced robo-advisors. We are generally not afraid of using technology to better our lives or to get a good deal.
The pandemic has proved that life without digital solutions would be unbearable. While these myths still surround digital wealth platforms, I certainly hope I have shed some light on it.
The author Wong Wai Ken, is the country manager of StashAway Malaysia, a robo-advisor regulated by the Securities Commission.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Photo credit: asktraders.com
