“We are changing the world with technology” – American IT magnate and philanthropist Bill Gates (b. 1955)
MODERN technology has changed our lives in many ways, revolutionising the way we work, live, and play. Technology is developing faster than ever before and is increasingly being used in our everyday life.
Finance which is one of the most impacted economic sector by technology has witnessed the emergence of robo advisory – an automated investment platform that renders investment advice while managing the development and maintenance of an investment portfolio.
Since robo advisory is still new concept for all of us, let’s see what it entails:
Advantages
- No distributor biasness
Typically, we worry that investment advisors, unit trust consultants or relationship managers are getting us into investments from which they stand to profit or enable them to reach their sales target.
As they are paid a commission, they benefit no matter what they suggest. Since they represent certain financial institutions, it will be difficult for them to provide unbiased advice.
- Lower service charges and annual management fee
Robo advisors tend to have lower service charges. No initial charges, no withdrawal charges, no account closure fee, etc. Most robo advisor firms charge around 0.2% to 0.8% annual management fee with no other hidden fees.
- Minimal or zero opening balances
In contrast to consultants or agents, robo advisor firms in Malaysia accept zero investment to open an account and don’t require a minimum balance. Younger investors, investors with small amount of capital or those just beginning to invest can immediately start their investment.
Disadvantages
- Focused on investment
In general, robo advisors focus on the investment portion only. It’s difficult to handle your overall financial situation, cash flow management, net worth positions, risk management, estate planning, debt management, tax planning and emergency fund.
- Lack on planning and advisory
Financial advisors or financial planners will help individuals to figure out their goals both over short- and long-term periods or to create a plan in order to assist them to reach those goals. A good financial planner gets to know you personally, helps you develop and implement a plan that leverages all existing financial tools to reach specific personal goals. Robo advisors are not financial planners.
- Less “human wisdom”
In reality, it’s certainly a little harder when you’re interacting strictly with technology as in the case of robo advisor. You are unable to discuss life changes like marriage, new born child, divorce, etc with a robo advisor.
On the contrary, human advisors can act as the voice of reason during high volatility times while preventing an investor from making emotion-based decisions. Human interaction will provide valuable insights that cannot be found in a robo advisor.
Conclusion
While robo advisors may seem to be a better alternative compared to human financial planners, we need to acknowledge that robo advisors are not perfect.
Their advice may not be fully customised according to our needs. In my opinion, we still need to work with both the robo advisor and a (human) financial advisor to get the best from both worlds. – Feb 1, 2022
Gunaseelan Kannan, CFP, is a licensed financial planner with Blueprint Planning Sdn Bhd and a certified member of Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
