When you’re beginning your investment journey, paying for solid financial advice is likely to be important to you. A joint study published in May 2014 by Aon Hewitt and Financial Engines indicated that investors who sought professional advice received annual returns up to 3% higher than those who decided to go it alone . Accurate and well-researched financial advice can be the difference between making and losing money on your investments, especially when you’re new to the game. However, without any experience or true appreciation of the impact of fees and charges on your returns, it’s easy to pay more than you need to.
Fees for managing your portfolio can take many forms. The most obvious one is the charge you pay to a financial advisor. Unfortunately, the less you invest, the higher the percentage you tend to pay, so for those investing under $100,000, it is common to pay 1.5-2% or more for this service. If you invest in an actively managed fund, where fund managers are in charge of investing on your behalf, you can expect to pay 1-1.5% . Many investment accounts also incur an administration fee, via a fixed amount or percentage, which can quite often be overlooked by new investors. You should also be aware of the sales charges or brokerage fees that are usually applied when you make a new investment. These can be as high as 5% of the transaction.
It can all be a bit overwhelming, but the message is clear: Don’t pay more than you need to for financial advice. If you add up all the potential fees and charges, you can end up making less money than if your assets were simply sitting in a time deposit at the bank.
Let’s look at two scenarios:
In the first scenario, Kevin invests $50,000 into a conservative portfolio with an average return of 5.25%. To simplify things, we’ll say the bank charges him combined fees of 2% and that Kevin doesn’t contribute anything further to this fund. After 10 years, Kevin’s expected fund balance will be $68,148. He’ll have spent $12,147 in fees. After 15 years, his fund balance will be $79,559 and he’ll have spent $19,785 in fees. Not to mention, other hidden costs such as withdrawal fees, set-up costs, statement request fees, and so on.
Kevin invests the same $50,000 into a robo-advisor with an average return of 4.85%, and again, after his initial investment he doesn’t contribute anything further. This time, his fees are capped at 1.25% and there are no hidden or add-on charges. After 10 years, Kevin’s fund balance is expected to be $70,799. He’ll have only spent $7,702 in fees, and his fund is $2,651 higher than the previous scenario. After 15 years, his fund balance has risen to $84,247. Having only spent $12,681 in fees, he’s made an incredible $4,687 more than when his fees were 2% even at a lower average return.
Had Kevin continued to contribute to his portfolio over time, with all other things being equal, the figures would be even more pronounced. Yet, even in this simple scenario, it’s clear that while the charges and fees you pay might sound small, they can result in drastic differences in your returns – perhaps even the difference between financial difficulty and a comfortable retirement.
So, where are you going to get trustworthy financial advice on your investments for a fee of only 1.25%? This is where robo-advisory technology comes in. A robo-advisor will help you make financial decisions based on complex algorithms that take into consideration your risk tolerance and investment goals. Statista reports that total amount of financial assets managed by robo-advisors in Singapore are expected to grow at a rate of 31.5% per annum from 2019 to 2023 . This rapid growth rate is due to the effectiveness of the technology and the low fees it incurs, which give new investors in particular the confidence to build their portfolio. Worldwide, assets under robo advisory management are expected to reach almost $1 trillion worldwide by 2020, according to a 2017 report by tech forecasters at Business Insider . With the unprecedented growth we have seen in 2018, it could easily be more.
Robo-advisory and AI technology open up the financial sector to a wider audience. The millennial generation in particular benefit from the availability of investment advice at a lower cost, and with millennial wealth expected to reach USD 24 trillion globally by 2020 , they represent significant investing potential. The 2017 report by Swiss investment bank UBS that predicted this growth also stated that millennials are twice as likely as baby boomers to want financial advice instantly via an app or chat capability . The convenience of robo-advisory technology integrates seamlessly into this on-demand economy.
Yet, while the millennials might be pushing for the convenience of on-demand services, the truth is that robo-advisory financial technology can work for anyone. In a sector where incorrect advice can result in the loss of someone’s entire retirement fund, it is a revolutionary way to gain solid and valuable insights into your investments without the sometimes crippling costs of fees and charges. If you’re looking at building an investment portfolio and don’t know where to start, robo is a solution worth looking into.
1 Financial Engines & Aon Hewitt “Help in Defined Contribution Plans: 2006 through 2012” Financial Engines, Edelman Financial Engines LLC. (05/2014)
2 Steverman, B. “An investor’s guide to fees and expenses” Business Times Young Investors Forum, Singapore Press Holdings Ltd. (20/10/2014)
3 Ho, T. “5 Common Costs To Be Aware Of When You Are Investing” Dollars and Sense, DollarsAndSense. (31/08/2017)
4 Statista. “Robo-Advisors: Singapore” Statista The Statistics Portal (ND)
5 Kocianski, S. “THE EVOLUTION OF ROBO-ADVISING”: How automated investment products are disrupting and enhancing the wealth management industry. Business Insider, Insider Inc. (03/07/2017)
6 Haefel, M., Smiles, S., Carter, M. “Millennials – the global guardians of capital, Wealth Management White Paper” UBS Chief Investment Office, UBS AG, UBS Switzerland A, UBS Financial Services Inc. (06/2017)
7 See 6
Ferri, R. “The Heavy Toll of Investment Fees” Forbes, Forbes Media LLC. (27/05/2013)
Rae, D. “Millennials: Your Top 5 Investing Questions Answered” Forbes, Forbes Media LLC (12/09/2018)
Mooney, A. “How a 1% hidden fee wipes 100,000 from a 100,000 investment” Financial Times, The Financial Times Ltd. (10/02/2018)
Morris, S. “The ins and outs of performance fees” Morning Star, Morningstar Asia Ltd. (04/06/09)
Dobbs, M. “The rise of young Asia: how millennials are transforming a region” Schroders, Schroder Investment Management Ltd. (01/11/2017)