You will be able to explain how a robo-advisor turns your answers into a model portfolio.
Arjun downloads a robo-advisor app on the MRT home. Within ten minutes it has asked him his age, what he is investing for, how long until he needs the money, and what he would do if his portfolio fell 20% in a month. Then it shows him a pie chart labelled with a risk level and a projected range of outcomes, and a button that says "Fund my portfolio". He has not invested yet. He wants to know how it got from his answers to that pie chart.
This lesson opens up that process. It is the same question you would ask of any adviser, digital or human: what did you base this on, and what did you leave out?
A robo-advisor is a service that gives investment advice and manages portfolios through software, using a questionnaire and a set of rules in place of a person. Most in Singapore build portfolios from funds and rebalance them automatically.
Because a robo-advisor is giving advice and often managing money, it is regulated like other firms that do those things. Robo-advisors serving retail investors in Singapore must hold the relevant licence from MAS for what they do, and MAS has issued guidelines on the provision of digital advisory services, which set out its expectations for how these services are governed. Those include how the algorithms are overseen and tested, and what has to be disclosed to clients. You can check any provider the same way you checked a platform in lesson 3.2, Fund platforms: lower charges, more of the work on you, by searching its company name in the MAS Financial Institutions Directory.
A licence tells you the firm is allowed to do what it does and is supervised. It says nothing about whether its portfolios will do well, the same point lesson 1.1 made about fund authorisation.
Behind the questionnaire sits a fixed set of model portfolios, often somewhere between five and a dozen of them, each with a risk level and a target mix of funds. The questionnaire's job is to place you in one of them.
Each question feeds a score. Your goal and time horizon suggest how much risk you can afford to take: money needed in two years cannot ride out a long fall, while money for retirement in thirty years can. Your answers on income, savings and existing investments suggest your capacity to absorb losses. The question about a 20% fall tests your tolerance, meaning how you would actually react. The rules combine these into a score, and the score maps to a model.
Arjun is 28, investing for the long term with no plan to touch the money for twenty years, and said he would hold through a 20% fall. The app placed him in its second-highest risk level. When he went back and changed only his answer about the fall, from "hold" to "sell some", it moved him two levels down. That one answer mattered more than his age or horizon, which is common in these questionnaires and worth knowing. Answer the loss question as you would really behave, not as you hope you would.
Most models mix equity funds and bond funds, and the proportions change with the risk level. A low-risk model might hold mostly bond funds with a small share in equities. A high-risk model might hold mostly equity funds with a small bond share. Some providers add other types, such as funds holding real estate, gold or cash.
The equity share is the main thing to look at, because it drives how far the portfolio can fall and how much it might grow. Two providers can call their portfolios "balanced" while one holds 40% equities and the other 60%, so compare the mix and set the labels aside. Lesson 4.2, The funds inside a robo portfolio and how it rebalances, looks at the funds themselves.
The projected range of outcomes on the screen is a model's estimate based on assumptions about returns. It is not a forecast and not a promise. Read the small print to see what return assumptions it uses.
A robo-advisor knows only what you told it. It does not see the unit trust you hold at a bank, your CPF balances, your property, or the S$15,000 of shares in your employer that came with your job, an example figure. So it builds a portfolio as if this account were all you have.
That can produce a mix that looks right on its own and wrong in your wider picture. If Arjun already holds a lot in shares elsewhere, a high-risk robo portfolio pushes his total even higher in shares. If most of his savings sit in cash for a home deposit, a low-risk robo portfolio may make him more cautious overall than he needs to be. The fix is to look at all of it together. Some robo-advisors let you add outside holdings or set a goal-based plan, but you still have to tell them.
You can complete most questionnaires and see the suggested portfolio before you fund anything. Doing that is a cheap way to see how a provider thinks, which of your answers move the result, and what it tells you about its reasons.
In the activity below you will complete one questionnaire without investing and note the portfolio it suggests and the reasons it gives.
Complete one robo-advisor's questionnaire without investing and record which portfolio it suggests and the reasons it gives.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).