You will be able to add up the advisory fee, fund costs and other charges into one yearly figure.
The robo-advisor Arjun is looking at puts its fee in large type on the home page: one low yearly percentage, no sales charge, no lock-in. He compares it in his head with the 1.75% expense ratio on Wei Ling's bank-sold fund from module 2 and thinks the answer is obvious. It may be. But the number on the home page is not the whole cost, and comparing it with an expense ratio compares two different things.
This lesson adds up what a robo-advisor really costs in a year, and what it would cost to buy the same funds yourself. Every figure in it is an example.
Most robo-advisors charge an advisory fee, also called a management fee or platform fee depending on the provider: a yearly percentage of the money you hold with them, usually charged monthly or quarterly from your account. Some use tiers, where the percentage falls as your balance rises, either on the whole balance or only on the part above each tier. A few charge a flat monthly amount instead.
Read the tier rules carefully. If the lower rate applies only to the part of your balance above a threshold, your average rate sits somewhere between the two. If it applies to the whole balance once you cross the line, the drop is sharper. The fee page or the terms will say which.
The advisory fee pays the robo-advisor. The funds inside your portfolio have their own costs, their expense ratios, which come out through their prices exactly as in lesson 2.2, Yearly charges: management fee, expense ratio and trailer fee. You never see them on your robo statement, but you pay them.
So the all-in yearly cost is the advisory fee plus the weighted average expense ratio of the funds. The weighted average means each fund's expense ratio multiplied by its weight in the portfolio, then added up.
Take Arjun's example portfolio from lesson 4.2, The funds inside a robo portfolio and how it rebalances, with expense ratios made up for the example. Developed markets equity, 50% weight, expense ratio 0.20%. Emerging markets equity, 10%, 0.25%. Global bonds, 30%, 0.15%. Short-term bonds, 10%, 0.10%.
Multiply and add. Half of 0.20% is 0.10%. A tenth of 0.25% is 0.025%. Three tenths of 0.15% is 0.045%. A tenth of 0.10% is 0.01%. The total is 0.18%. With an advisory fee of 0.6%, the all-in cost is 0.6% plus 0.18%, which is 0.78% a year.
On S$20,000, that is S$120 in advisory fees and S$36 in fund costs, S$156 a year in total.
Two more costs reduce your return without appearing on any fee page.
The first is currency conversion. If the funds are priced in US dollars and you deposit Singapore dollars, your money is converted, at the provider's rate or its broker's. The gap between that rate and the market rate is a cost, paid every time money goes in or comes out. Some providers state their conversion spread, and some do not.
The second is withholding tax on dividends. Many countries tax dividends paid to foreign investors before the money reaches the fund. A fund domiciled in one country holding shares in another may lose part of every dividend this way, and the rate depends on the fund's domicile and the tax treaties that apply to it. The course Build and run an ETF portfolio covers this in lesson 3.3, Domicile and withholding tax on dividends. For now, note the domicile of each fund and remember that this cost exists.
Neither cost can be added neatly to the 0.78%, so write them as notes beside it.
Now the comparison that tells you what the automation is worth. Suppose you bought the same four funds yourself through a brokerage account. You would pay the same 0.18% in fund costs, plus brokerage commissions each time you bought or sold, plus your own time choosing, rebalancing and keeping records, and you would face the same currency and tax costs.
On S$20,000, the gap is roughly the advisory fee, S$120 a year, less whatever you would pay in commissions. Over many years and a growing balance, that gap grows too, and module 7 shows by how much.
So the question becomes: is S$120 a year worth it to you for what the robo-advisor does? It decides the mix, rebalances without being asked, reinvests income and handles the dull work. For someone who would otherwise leave cash idle or tinker with every market move, that may be good value. For someone who would happily rebalance a two-fund portfolio once a year, perhaps less so.
Arjun is in between. He likes the idea of doing it himself but knows he has not yet done it.
The method takes four lines: the advisory fee in dollars, each fund's cost in dollars by weight, the total, and the notes on currency and tax. In the activity below you will do it for one robo portfolio on S$20,000, showing the advisory fee and the weighted fund costs separately.
Calculate the all-in yearly cost of one robo portfolio on S$20,000, showing the advisory fee and weighted fund costs separately.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).