You will be able to explain how a robo-advisor uses your answers to place you in a model portfolio.
When you open an investment app today, it can suggest a portfolio within a few minutes. You work through a set of questions, a chart comes up, and there is a button to invest on the spot. The screen seldom tells you how your answers turned into that chart, or which questions the app never asked. Ask any adviser two things, whether the adviser is software or a person: what the advice rested on, and what it left out. With a robo-advisor you can find out both before you put in any money.
A robo-advisor gives investment advice and manages portfolios through software. A questionnaire and a set of rules do the work a person would otherwise do. In Singapore, most of them put your money into funds and rebalance those funds automatically. Lesson 4.2, "The funds inside a robo portfolio and how it rebalances", covers the funds themselves and how the rebalancing works.
Because these services advise people and often manage their money, they are regulated in the same way as other firms doing that work. One that serves retail investors in Singapore needs the relevant MAS licence for the activities it carries out. MAS has also published guidelines on the provision of digital advisory services. They describe how MAS expects such services to be governed, including how the algorithms are overseen and tested and what clients must be told.
To check a provider, type its company name into the MAS Financial Institutions Directory. You ran the same search on platforms in Lesson 3.2, "Fund platforms: lower charges, more of the work on you". A licence means the firm may carry on its business and that MAS supervises it. It tells you nothing about how well its portfolios will do. Lesson 1.1 made the same point about fund authorisation.
Take Arjun (an invented example). On the MRT home he downloads a robo-advisor app. In under ten minutes it has asked his age, what he's investing for and when he'll need the money. It also asks what he would do if his portfolio dropped 20% in a month. Then a pie chart appears with a risk level on it, along with a projected range of outcomes and a button reading "Fund my portfolio". Arjun hasn't put any money in yet. He wants to understand how his answers produced that chart.
The app holds a fixed set of model portfolios, often somewhere between five and a dozen. Each one has a risk level and a target mix of funds, and the questionnaire exists to sort you into one of them. It asks about your goal, your time horizon, your income, your savings, what you already invest in, and how you would respond to a loss. Each answer adds to a score.
Each answer measures something different. Your goal and time horizon show how much risk you can afford to take. Money you need in two years can't sit through a long market fall, while money for a retirement thirty years away can. Your income, savings and existing investments show your capacity to absorb losses. The question about a fall measures your risk tolerance, which is how you would actually react when your portfolio's value drops. The rules combine all of these into one score, and that score maps to one model portfolio.
Arjun told the app he was 28, investing for the long term, wouldn't touch the money for twenty years, and would hold on through a 20% fall. It put him at its second-highest risk level. He then went back and changed only the fall answer, from "hold" to "sell some", and the app moved him two levels down. In these questionnaires the loss-reaction answer often counts for more than age or time horizon. Answer it with what you would really do, rather than what you hope you would do.
Most model portfolios combine equity funds with bond funds, and the balance between them shifts with the risk level. A low-risk model might be mainly bond funds with a small equity share. A high-risk model might be mainly equity funds with a small bond share. Some providers also include funds that hold real estate, gold or cash.
Look first at the equity share, because it largely decides how far the portfolio can fall and how much it might grow. The name a provider gives a portfolio can't be compared with names at other firms. A portfolio called "balanced" could be 40% equities at one provider and 60% at another. Ignore the labels and compare the actual mixes.
The projected range of outcomes on the screen is a model's estimate, built from return assumptions. It is not a forecast or a promise. The return assumptions behind it are in the small print, so read them before you rely on the chart.
A robo-advisor works only with what you tell it. It can't see unit trusts you bought through a bank, your CPF balances, any property, or shares you received through your job, such as S$15,000 of shares in your employer (an example figure). It builds the portfolio as if this one account were everything you own. The result can look sensible on its own and still be wrong for your finances as a whole.
Go back to Arjun. If he already holds a lot of shares elsewhere, a high-risk robo portfolio raises his total share exposure even further. If most of his savings are in cash for a home deposit, a low-risk robo portfolio could make him more cautious overall than he needs to be. In both cases the fix is to look at all your holdings together and judge the suggestion against them. Some providers let you enter outside holdings or set a goal-based plan, but you still have to give them that information yourself.
Most questionnaires let you finish and see the suggested portfolio before you deposit anything. It costs you very little, and it shows you how a provider thinks, which answers change the result, and what reasons it gives. When you try one, work through these checks in order:
Search the company name in the MAS Financial Institutions Directory to confirm its licence. Answer the questionnaire honestly, especially the loss question, and don't fund the account. Write down the equity share of the suggested portfolio and ignore its label. Find the return assumptions behind the projected range in the small print. Compare the suggestion with what you hold outside the account: bank unit trusts, CPF, property, employer shares and cash savings. If the provider allows it, add your outside holdings or set a goal-based plan.
In the activity below you will complete one questionnaire without investing and note the portfolio it suggests and the reasons it gives.
Fill in one robo-advisor's questionnaire without putting money in, then write down the portfolio it suggests and the reasons it gives.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).