Are Robo Advisors Worth It? Here’s How To Decide

Robo-advisors appeal to those who are new to investing or don’t have a lot of investment capital. However, before deciding to invest with a robo-advisor, consider whether it’s right for you.

Robo-advisors have become increasingly popular in recent years. They cost much less than a traditional financial advisor, making them more accessible to investors with smaller net-worth. 

What’s more, they’re also appealing to those who don’t want to spend time managing or building their investment portfolio, which is great if you’re new to investing.

According to Statista, assets under management (AUMs) managed by robo-advisors totalled US$1.3 trillion in 2021, and that figure is expected to more than double in 2026.

However, before deciding to invest in a robo-advisor, you need to consider whether it’s right for you. Below are some of the questions to help you figure out.

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What is your risk tolerance?

One of the first things to help you decide whether a robo-advisor is right for you, is to understand your risk tolerance.

For instance, if you’re a high-risk, high-rewards person, then you might find individual stocks more appealing. 

However, remember that the stock market goes up and down all the time, so they’re also more vulnerable to market volatility. 

During a bear market, you might see the market drop further, and if you can’t stomach the volatility, then you may panic and try to sell to cut your losses.

The same could be said about more volatile asset classes such as cryptocurrencies. Like stocks, cryptocurrencies also offer good returns and the cryptocurrency industry is growing stronger. However, they’re known to be highly unpredictable and are prone to cybercrimes and theft.

On the other hand, robo-advisors mainly invest in exchange-traded funds (ETFs) and index funds, which are more diversified and less volatile. 

The algorithm used by robo-advisors is also based on the Modern Portfolio Theory, a popular investment strategy for creating a diversified portfolio to maximise returns within an acceptable level of risk. So instead of trying to beat the market, a robo-advisor is designed to match the market. This means that robo-advisors can be consistently efficient at a low cost.

Do you want to be involved in your investments?

Investing requires a lot of hard work and research, and you may not like spending time analysing the stock market or managing your investments. 

Aside from that, you also need to understand your own investment goals (e.g. for retirement or funding your children’s college education), risk tolerance, and continually contribute and diversify your portfolio. 

If you prefer to delegate the management of your portfolio, then you may appreciate the automated features of a robo-advisor, which include working on rebalancing your portfolio and executing trades.

While you can always approach a financial advisor for help, a robo-advisor can do it at a lower cost. For instance, a financial advisor typically charges a management fee of 2% to 3% of your portfolio, whereas a robo-advisor charges less than 1%.

That said, because robo-advisors do the investing for you, you don’t have a lot of flexibility in deciding what to invest or choosing how to adjust your portfolio. For example, if you want to buy Tesla shares after a stock split, you can’t do it with a robo-advisor. 

If you prefer to pick your own individual stocks or want more control over what to invest in, then a robo-advisor isn’t for you. 

Do you need financial management services?

A robo-advisor provides automated functions and uses algorithms to analyse your risk and provide you with personalised investment advice. What’s more, everything can be done online without needing to meet anyone.

However, while they’ve become more advanced in recent years, they’re still only limited to basic investment functions. 

They can’t help you with complex situations, such as estate or retirement planning. They’re also not equipped to deal with unexpected crises such as job losses or if a new expense has come up. Your funds will continue to drain if you’ve set up automatic withdrawals. 

In such instances, a financial advisor is more suitable. A financial advisor does more than just help you crunch numbers, and can understand your goals and risks better than a robo-advisor and also educate you on your investment options/strategies.

That said, financial advisors may not always be the best option. For example, they may not fully understand or meet your needs. 

Investment capital and experience

If you’re a beginner investor with less than S$25,000 investment capital, then robo-advisors are more suited for you. 

They offer very low investment minimums (some don’t require you to have a minimum investment amount/balance) and charge a low fee compared to traditional brokerages. This makes them accessible to a lot of people.  

You also don’t have to spend time analysing stocks or rebalancing your portfolio, which is good if you don’t have a lot of investing experience. Basically, all you need to do is to invest consistently and the robo-advisor will automatically manage your investment and build your portfolio for you. 

Expected returns

If you want higher returns, you could either manage your portfolio on your own (if you’re confident in doing analysis for your investments) or work with a financial advisor who can help with your investment goals. 

For example, if you believe in Tesla’s core values and believe the company will only grow stronger, you can buy its shares. Think the tech sector will become more valuable in the future? Invest in tech ETFs. 

However, as mentioned, higher returns also come with higher risks. So if you prefer a passive or more stable way of investing, robo-advisors are for you. 

Some people argue that robo-advisors have not been proven against unexpected events (e.g. stock crash).  However, according to a report, nearly 90% of fund managers underperformed against the stock market in a 20-year period.   

One thing to note is that robo-advisors are still relatively new, so there’s not a whole lot of data on their performance over the long-term. However, this report says that robo-advisors had an average annualised return of 12.54% from September 2016 to September 2021.

Read these next:
Comparing The Returns & Fees Of The Top Robo-Advisors In Singapore (2022)
How To Set Investment Goals If You’re A Newbie
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How to Build a Passive Income Portfolio Using ETFs (And Why You Should)
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