You will be able to add the advisory fee, fund costs and other charges into one yearly cost.
A robo-advisor usually shows its fee in large type on its home page as one low yearly percentage. It is tempting to set that number beside the expense ratio of a fund you already know and decide which is cheaper. That comparison puts two different things side by side, and the headline fee is not the whole cost. To know what you pay each year, you need to add up the parts yourself and convert them into dollars.
Take Arjun, who is looking at a robo-advisor's home page. It shows one low yearly percentage, no sales charge and no lock-in. He thinks of the 1.75% expense ratio on Wei Ling's bank-sold fund from module 2 (this and the other figures in Arjun's case are examples) and decides the answer is obvious. He may be right. But he is comparing two different things, and the headline figure leaves out part of what he would pay.
Most robo-advisors charge an advisory fee, a yearly percentage of the money you hold with them. Some providers call it a management fee or a platform fee. It is usually taken from your account monthly or quarterly, and it is what pays the robo-advisor.
Some providers use tiered fees, where the percentage falls as your balance rises. There are two ways this can work. If the lower rate applies only to the part of your balance above a threshold, your average rate ends up somewhere between the two rates. If the lower rate applies to your whole balance once you cross the threshold, the drop is sharper. The provider's fee page or terms say which method it uses. A few robo-advisors charge a flat monthly amount instead of a percentage, so check for that too.
The second cost sits inside the funds. Each fund in the portfolio has its own expense ratio, and that comes out through the fund's price, as Lesson 2.2, Yearly charges: management fee, expense ratio and trailer fee, explains. You will not see these costs on your robo-advisor statement, but you still pay them.
So your all-in yearly cost is the advisory fee plus the weighted average expense ratio of the funds. To get the weighted average expense ratio, multiply each fund's expense ratio by its weight in the portfolio, then add the results.
Arjun's example portfolio comes from Lesson 4.2, The funds inside a robo portfolio and how it rebalances. It holds four funds, and the expense ratios here are made up for the example.
Developed markets equity is 50% of the portfolio at a 0.20% expense ratio, so half of 0.20% gives 0.10%. Emerging markets equity is 10% at 0.25%, and a tenth of 0.25% is 0.025%. Global bonds are 30% at 0.15%, and three tenths of 0.15% is 0.045%. Short-term bonds are 10% at 0.10%, and a tenth of 0.10% is 0.01%. Adding these gives 0.10% + 0.025% + 0.045% + 0.01% = 0.18%, which is the weighted average expense ratio.
The advisory fee is 0.6%. Adding the two gives 0.6% + 0.18% = 0.78% a year, all in.
Now convert to dollars. Arjun has S$20,000 to invest. The advisory fee on S$20,000 is S$120 a year, and the fund costs are S$36 a year, for a total of S$156 a year.
You can lay out any robo portfolio the same way, in four lines:
Advisory fee in dollars: the advisory fee percentage multiplied by your balance. Each fund's cost in dollars: its expense ratio multiplied by its weight and by your balance. Total: the advisory fee dollars plus the fund cost dollars. Notes on currency conversion and withholding tax: each fund's domicile and any conversion spread the provider states.
Two more costs reduce your return but do not appear on any fee page. You cannot add them neatly to the all-in percentage, so write them as notes beside it.
The first is currency conversion. If the funds are priced in US dollars and you deposit Singapore dollars, your money is converted from Singapore dollars to US dollars to buy the funds. How the provider charges for that conversion, and when the charge applies, differs from one provider to another, so check the provider's fee page or terms. Some providers state their spread and some do not. If yours does, write it down.
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 that holds shares in another may lose part of every dividend this way. The rate depends on the fund's domicile and the tax treaties that apply to it. For now, note each fund's domicile and remember that the cost exists. The course Build and run an ETF portfolio covers this in detail in lesson 3.3, Domicile and withholding tax on dividends.
If you bought the same funds yourself through a brokerage account, you would pay the same expense ratios. You would also pay brokerage commissions on each buy or sell, and spend your own time choosing funds, rebalancing and keeping records. The currency and withholding tax costs would be the same either way.
So the yearly gap between using a robo-advisor and doing it yourself is roughly the advisory fee, less whatever you would pay in commissions. For Arjun on S$20,000, that is roughly S$120 a year, less commissions. The gap grows over many years and as the balance grows, and module 7 shows by how much.
For its fee, the robo-advisor decides the mix, rebalances without being asked, reinvests income and handles the dull work. It may be good value if you would otherwise leave cash idle or tinker with every market move. It may be less good value if you would happily rebalance a two-fund portfolio once a year.
Arjun is somewhere in between. He likes the idea of doing it himself, but he knows he has not done it yet.
To make the comparison for yourself, take the advisory fee in dollars, subtract what you would pay in brokerage commissions, and weigh what is left against what the robo-advisor does for you. The question to answer is whether that advisory fee, in dollars, is worth it to you for the work it covers.
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.
Work out the all-in yearly cost of one robo portfolio on S$20,000, with the advisory fee and the weighted fund costs shown on separate lines.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).