Battle of the Robos: The Subtle Differences Between Robo-advisors in Singapore
More and more financial services are going digital and in the local investment industry, Robo-advisory (also known as “Digital Advisory Services”) has sprung up to transform the landscape. Riding on the wave to digitalise the investing environment, many Robo-advisors are marketing themselves with buzzwords like “algorithmic models” and “artificial intelligence”.
Most Robo-advisors in the market today are similar in the way they perform risk-profiling: whereby the customer inputs his details and answer a questionnaire. Using algorithmic tools to analyse the customer’s data and measure against predefined parameters for risk profiling, the Robo-advisor would categorise the risk profile of the prospective customer and depending on the business models, either introduce investments of similar risk profile to the customer for discretionary mandate or recommend investments on advisory basis.
However, with the slew of Robo-advisors mushrooming out to compete in this space, there are still some subtle differences about the types of Robo-advisory and investors should be better informed before they commit their monies.
Key Difference 1: SFA Versus FAA
Categorically, Robo-advisors are also required by the Monetary Authority of Singapore (MAS) to be licensed under the Securities and Futures Act (SFA) or Financial Advisor Act (FAA), depending on their operating model.
According to the MAS’ “Guidelines on Provision of Digital Advisory Services”, Robo-advisors operating under the FA licence “can carry out limited SFA-regulated activities that are incidental to the provision of advice, without the need for additional licensing under the SFA”. In simpler words, there are limitations on how much FA-licensed Robo-advisors can add value to their customers as compared to Robo-advisors operate by fund managers licensed under the SFA (“Robo-managers”).
What are the key limitations in term of products and services provided?
While FA-licensed Robo-advisors can act like fund managers to periodically rebalance their clients’ portfolios, such rebalancing is restricted to buy and sell listed and unlisted collective investment schemes (e.g. exchange-traded-funds & unit-trusts respectively) that are pre-approved by the clients as part of the agreed asset allocation (“Stock Universe”). This also means that FA-licensed Robo-advisors and investors may not be able to timely seize investment opportunities outside of this Stock Universe because investors’ consent is required for each addition to the Stock Universe before any trade can be carried out.
On the other hand, Robo-managers are able to construct model portfolios that invest beyond listed and unlisted collective investment schemes. When investors give investment mandates that empower Robo-managers with discretionary rights, Robo-managers are in a better position to seize investment opportunities on behalf of their clients as prior investors’ consent for each new addition to the investment portfolios is not required.
Key Difference 2: Product-Platform Provider Versus Platform Provider
Essentially, all Robo-advisors are digital platforms. However, due to the scope of activities allowed under the FAA and SFA, FA-licensed Robo-advisors are more of a platform provider distributing investment products through financial advisory while SFA-licensed Robo-managers are product-platfom provider as they are able to structure and offer investment products such as unit trusts (“UTs”) or exchange-traded-funds (“ETFs”), subject to their licence conditions.
Key Difference 3: Execution of Investments
In accordance to the MAS’ “Guidelines on Provision of Digital Advisory Services”, FA-licensed Robo-advisors “are not allowed to handle or have control over clients’ assets or moneys, or operate an omnibus account for clients”. The implication of this in relation to execution of investments is that bulk trades cannot be executed using omnibus account for clients to take advantage of lower transaction fees, if any.
On the other hand, Robo-managers are able to execute bulk trades to take advantage of lower transaction fees and subsequently allocate the completed trade quantity to customers’ accounts. Bulk trades also enable individual investors to tap into investments that were once not easily accessible.
Key Difference 4: Expertise
As SFA-licensed Robo-managers are able to invest discretionarily in capital market products beyond listed and unlisted collective investment schemes, they are complemented by professional fund managers that harness their wealth of investment experiences in navigating the ever-changing landscape in the investment universe.
Key Difference 5: Established Financial Institutions Versus Start-upsNonetheless, the Robo-advisory scene in Singapore is still in the nascent stage. In order to fast-tracked the digitalization of financial services in Singapore, there was actually some easing up of track record requirements for Robo-advisors in 2018.
In the last few years, many Robo-advisor platforms have sprung up in Singapore and most would still be considered start-ups with less than 5 years of track record. The concern relating to this phenomenon is the potential for these start-ups to fold their operations, jeopardising investors by forcing them to liquidate their holdings at a loss. Such was the case of Smartly, a Robo-advisor that wound down in March 2020.
On the other hand, there are also Robo-advisors operate by established financial institutions (“FI”) that are stable with good track record. Hence, it is important for investors to also consider the financial stability of Robo-advisors before they part their moneys with Robo-advisors.
Apart from how investments are managed, the caveat for Robo-advisory platforms is that oversight on the algorithms behind the risk profiling tool; development, monitoring and testing of the client-facing tool; management of the technology risk, cybersecurity risk and personal data protection must be sufficiently robust as stipulated by the MAS. In this aspect, the FI-related Robo-advisors are also advantaged compared to start-ups given that they already have the know-hows.
Although the advent of Robo-advisors have brought along the added-value of convenience to the investing community, investors need to realise that investing through Robo-advisors is also somehow “investing” in the Robo-advisors due to the start-up nature of the environment. Apart from understanding one’s personal preference of discretionary or non-discretionary portfolio management services, investors should also evaluate the stability and track record of the Robo-advisors.
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