Ep 82: 3 Potential Pitfalls When Using Robo-Advisors

Okay, before I go deep to discuss some of the problems that I’ve observed with retail investors using robo-advisors, I must be very, very clear that I’m actually pretty supportive of them in general, because I find it hard to replicate what they’re doing at the fees that they’re charging. Because they are so tech enabled, they have a much bigger reach and they can provide a much better service because of all these tech processes that they’ve built. They don’t need the middle office, they don’t need the back office. Very limited, very lean kind of operation that allows them to engage customers and acquire customers at a much cheaper cost. So they can charge you this kind of minuscule advisory fees or management fees for the kind of quality of investment perspective, advice and strategies that they can provide to you today. Whether you are, you know, entry-level new guy or you’re relatively seasoned, you know what you’re doing, I do think they provide pretty quality service and advice generally. 

One thing that a lot of people would love to believe is that they are unique and they’re special, right? Most people want to believe that “wah, I’m special. I’m the only one out there”, but actually many people’s financial realities are pretty generic. If you subscribe to the narrative of going to school, getting a job, buying a flat, setting up a family, you don’t have amazing career progression, you’re not a huge business tycoon or you don’t have a very big medical situation and whatnot… you don’t have 7 kids, 8 kids, 10 kids, right? Generally, your financial situation is pretty generic, very similar to many other people. As much as you would like to believe that you are special, as much as some of your advisors want to make you feel like you are special, actually you are not. 

So if you are extremely generic, you subscribed to the narrative, which is not a problem, then actually a lot of these kinds of platforms and digital services allow you to get that exact same thing that you need for much, much cheaper costs. So generally, I think it is good price for the quality you’re getting. And for everyone else that do not know how some of the traditional, the quote, unquote, “traditional financial advisors”, like the human ones, how do they manage your money?

Essentially after you sign up with them, you give them the account and whatnot, they will set up an account on the back end. So on the back end, they have all these kinds of wholesale services, which generally they are using either AXA or they’re using FSMOne which you can have direct access through iFAST these days. But what is interesting is they will literally go to all this back end and click for you. And a lot of them do not know what they are click… okay I’m not saying everyone, but my view is because they are so trained with sales and insurance and product and engaging clients, most of them do not really know about investments. It’s very hard for them to know, so they will end up rehashing what the agency tells them. And I’m not sure how well do agencies know about investments, because their incentive system is really about transaction volume and traders kickback. Alright so.. aiya it’s a very complex discussion. I’m not pointing fingers at who, but if you compare the human advisors out there and the kind of investment advices in these kinds of robo companies, you would realize that for the amount of money that you’re paying, you’re getting a much, much better investment guy. But let’s let the thesis play out because of course the investment guys in these robo-advisor companies generally are a lot more seasoned, but this whole arrangement of using robos is still very new. So let’s see how things play out. 

Given that most people have very generic requirements and robo-advisors give you a bang for your buck, I’m pretty supportive of them. But I do observe some problems and one of the main problems, right, people actually have a perception that they know how to invest after they use robo-advisors. Recently when I visit cafes and I hear every table talking about investing, I’m like, “wow, everyone macam like a pro”. Everyone talking about investments… like you and your date go out, you hang out, but you don’t want to talk about life. You talk about investments. Yeah… I was trying very hard not to join into their conversations but you know, this is a semi career kind of thing? So I was pretty focused on their discussion and a lot of the discussion is pretty shallow from my perspective, because they’re just talking about the robos. They’re talking about the different platforms and they all make it sound like “Oh, I know how to choose this. You know, I know how to invest, you know, I know my thing”. 

But if you really understand this thing, you need to recognize that when you’re using a robo advisor, they are the one making the investments for you. You have not done anything, but choose the robo, right, unless you have went into look at the investment thesis and understand actually what they’re doing, what is their strategy, what are you signing up for. For most people, sorry to say, you don’t actually know how to invest. You just have made a better decision relative to finding a human advisor in my view. Because the costs here is cheaper and the user interface is better and whatnot right. So I think you’ve made a better choice in that sense. I’m not recommending you any guy, I’m not going to name any names but the general idea here is that you don’t know how to invest. 

For most people, most people that I interact with, you don’t actually know how to invest and it’s perfectly okay. You can just pick your advisor, it’s the same idea. Now, I don’t recommend people to pick their own ETFs, I don’t recommend people to do their own stocks. I think there is a small subset of people that will do great and potentially can do it. But for many other people that… it’s just not sufficiently vested in personal finance or becoming an investor, then pick your robo advisor and let them do their magic and go and live your life, right? But don’t ever think that you know how to invest just because you have picked a quote unquote, “better” robo-advisor. 

Which brings me to point number two, and that is, there are so many robo-advisors out there and there will be more to come… I can almost guarantee you that of different sizes, not every robo-advisor will be the big dominant one, but what is interesting is with the easy access to your portfolio, it actually makes it very hard for you to hold long-term from a psychological standpoint and I’ll come back to you after a word from our sponsor. 

So okay, in the past, you don’t actually get easy access to your portfolio like your money’s locked up somewhere, right? Whether is it an investment-linked plan, a unit trust, or you use your banker, your broker, whatever. For most people, the money just kind of gets siphoned out as a portion of your income, and it goes somewhere and it gets locked up there. It grows and grows.. supposedly it grows and grows huh. But these days with robo-advisors, you get direct access, right? You’re just a face scan, you’re just a password away to interact with your portfolio. So you can go in and day in, day out, you can see the numbers. It gives you the kind of dopamine interaction that you have with every other app, like a tweet, like a Facebook thing. It’s the same, right? It’s all random notifications, also a problem. But what is interesting is a lot of robo-advisors, they actually use very long-term strategies. Even the quote, unquote, “more actively managed” ones are not that active. They predominantly share with you things like index funds, ETFs and broad based strategies, broadly diversified. Most of the robo-advisors are pushing this idea. 

What does that mean? It means that you probably shouldn’t be actively interacting with your portfolio. You want time to play out. You want your portfolio to grow over an extended period of time, 5 years, 10 years at the very least. For most of these robo-advisors, their strategies require that kind of long-term play, 5 year, 10 year, 20 years. You know, it’s no different from a lot of what the human advisors, their kind of timeline that they were recommending. But why I think robo is better is because smarter people managing investments lah. But if you think about it, it’s the same kind of investment timeline that people are going for. So when you have an app that gives you that kind of dopamine rush, where everybody can just scan and interact and immediately be there, it becomes very hard for you to stay to this strategy. It becomes very hard for you to stick to your portfolio.

I’ve talked to enough of these investment managers in the robos to know that when the market moves, they see cash outflow. So when the market moves in a sense that when the market’s going down, they see cash outflow. I don’t know the exact numbers, but that is what they tell me. So when you recognize that, then you realize that, eh it becomes very hard because you’re timing the market. You’re trying to leave when the market is not doing well, and then you want to come back in. So then you don’t subscribe to the long-term strategy anymore. You fail the long-term holding strategy, right? This is a very real reality when you have easy access to your portfolio, just a click away.

So what I would recommend you to do is to turn off all your robo-advisors’ notification. Generally I turn off most of my notifications, but what’s the best ah? The best is you choose your robo-advisors. You go in, you click, you set up a portfolio and then you delete that app. So you don’t even give the robo-advisor any kind of way to interact with you on a day-to-day live basis or on a push notification basis.

The reality is if something is going off, is big enough, you will see it somehow. It will happen on Instagram. It will happen on Facebook. It will happen somewhere, right, if it’s that big. If not, most of the time, it is just the media going through their news cycle. You don’t need to care about it. So set and delete it and go and live your life. Then it will give the time, 5 years, 10 years for these robo-advisors to play out their investment plan because most of them, in fact, I think I can safely say 99% of all of them, maybe there’s this one guy weirdo in the market that I don’t know yet. But 99% of all these robo-advisors are recommending you very long-term, broadly diversified strategies. But the medium of digital interaction does not help you with staying with this strategy because you get all these media and dopamine and all those kinds of things, right? So make sure you recognize this, set and delete it, off your notifications, go and live your life and let the strategy play out. 

Which brings me to point number three. Many of these portfolios recommended by a robo-advisor actually are a lot more complicated than it seems, you know? So I’m not saying whether is it good or bad, like this kind of portfolios with thematic ETFs, cyclical, repositioning, broadly diversi.. et cetera. All these are just strategies that they believe in. The investment manager believes that this is the best way forward. That’s why they do it this way. So I think their investment portfolios are relatively sound, there are basis to it. Why.. How do I determine that something is sound? Because there’s rigour, there’s basis to it. And you know, the thing is intact, right? And it’s a bit hard for me to tell you everything at once, but the idea is very much linked to the kind of quality of investment advice that comes along with the quality of the investment manager. Which is why over time, you really just pick an advisor based off their investment ideas and their portfolio strategy. That is the best idea in the retail space, to be able to learn enough, sufficient so that you can go and pick someone that shares your ideology, or you understand what they’re saying, and then they can manage your money.

But what is happening in the market today is a lot of the robo-advisors are selling you with a few themes, easy to use, safe, regulated by MAS, fast, highly accessible, digital interface, very nice UI, UX and promo code, all these kind of things, which are not exactly a problem if you are running a shopping app lah right. So okay these are like, generally all the app businesses, they will do these kinds of things. Marketing, right? But I feel that it is not particularly acceptable for people to put money into robo-advisors without understanding the investment strategies and just focusing on the UI, the safe, regulated by MAS, easy to use, easy to onboard and promo code, all these kind of things. 

So while I am broadly supportive of robo-advisors as a broad climate shift in leveraging our technology to make things better, cheaper for all of us, I caution you guys out there to remember to look beyond all those low level marketing taglines of “easy to use”, “safe”, “regulated by MAS”, promo code, onboarding UI, blah, blah, blah, and actually look at their investment strategies to understand the different robo-advisors based on what they are doing with your money. Fundamentally, the main service that they’re providing you is investments. It is not a nicer UI, it’s not a shopping app. Okay? 

So it is no different from evaluating a human FA. You need to understand what they are doing, you need to understand what they’re saying. And for every one of you that is not particularly vested with being very good at investing, picking our own stocks, I feel that at the very core of my heart, I feel that you should still learn basic things like how to evaluate index funds, what are the risks of themed funds, how do you understand bonds, some basic understanding before you put your money with whoever. Don’t be in a rush. I know there’s this whole long-term compounding thing going on but at some point, you need to realize that it’s better to understand what you’re doing than just rush into something because long-term compound lor.

So I’m going to sum up today with the three biggest problems I observed with robo-advisors. Number one is the perception that you actually know how to invest. Recognize that you are outsourcing the investment work to someone. While it seems like you are making the choice, it seems like you’re clicking.. choosing the app, picking the portfolio, it seems like you are doing the work. Actually you are not, you are just outsourcing it to someone else. Number two is the easy access to portfolio actually makes it very hard for you to hold long term because of dopamine rush, because of media cycles. So once you have decided what portfolio… which investment robo-advisor to use, set it, forget it, delete the app, or at least turn off your notification. And number three is that many of these portfolios are actually a lot more complicated than it seems. So look beyond low level marketing tagline and actually go and study a little bit of what they are trying to do. Study index funds, study bond funds, understand the major ETFs out there and you will have a much better basis to evaluate which robo-advisor to use. Fundamentally, they are managing your money. They are not selling you an app, okay? So I hope you learned something useful today. See ya.

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Okay. I hope you recognize what I’m trying to say. I’m not saying that robos are bad, but yeah, really understand that you may not know what you are doing and robo-advisors do have some very real pain point from the way we interact with them. I think also because it’s very new, in terms of the way we invest our money, it’s a whole new way to look at things. So yeah, pretty challenging in its own sense. But yeah next week is the extra Tuesday of the week like, wah I didn’t know. I only prepare four weeks’ content and then there’s one more week, one more week in this month. So next week I’m going to spend a little bit of time to talk about finding peace in the digital finance ecosystem, because it is an era where finance will be increasingly digital and increasingly at the touch of your fingertip. So how do you find peace in such a dynamic situation, right? Investments and money in general, it used to be very far flung from our lives. It’s not part of our lives, not as closed as compared to what it is today. So then how do we find peace in this highly dynamic and digital era of finance? That will be what are we going to talk about next week. The guests for later this week,  we have not decided yet. I’ll keep you posted. Bye.