Silicon Valley, the birthplace of most startups, has incubated many successful robo-advisors that have managed to deliver enough value and gather enough assets for them to be sustainable, such as such as Betterment and Wealthfront.
With the ease of access of capital and scale through technology, fintech startups have been challenging incumbent players across different product verticals. While some were able to grow exponentially and eventually able to serve their clients' needs sustainably, many struggle to deliver value while managing costs in a competitive landscape .
How do robo advisors like Endowus leverage the learnings (and avoid the pitfalls) from our more experienced counterparts in the West? What about competitors such as brokerages and banks or even fund managers? How do we continue to be ahead of the innovation curve in Singapore?
Sheng Shi Chiam, the Personal Finance lead of Endowus, and William Hofmann at ValueChampion share their experiences and analyses as industry insiders to Singapore and US robo advisors and on what prospective users of robo advisors should look out for.
1:00 Introduction to and history of robo-advisory in US
8:50 What works for US robos: US ETFs
13:53 Fee comparison against traditional players
18:21 Robo-advisors and digital wealth in SG
20:00 Why use digital advisors?
22:50 How should we choose between different robo-advisors?
50:08 Intro to ValueChampion
Excerpts from the session
Q: What are the differences between a digital wealth platform and a robo-advisor (24:55)?
Sheng Shi: The two terms are often used interchangeably by both investors and the industry, but there are nuances involved.
Generally, robo-advisors use algorithm-driven investment decisions or asset allocations vetted by the robo-advisor's Chief Investment Officer (CIO). The algorithm makes the recommendation and the CIO is the “second eye” to the investment decision.
However, a digital wealth platform like Endowus is “human-first” in terms of investment decisions, and the automation takes over in terms of rebalancing, projection of your wealth over a period of time and risk profiling.
Q: What is the investment approach and strategy that Endowus adopts (33:17)?
Sheng Shi: We are passive in asset allocation by nature – we do not try to generate additional returns as a platform by actively trading your investments and we keep costs low. What we essentially do is to give access to good investment products. We do not aim to generate additional returns and manage securities as there are many huge asset management companies like Vanguard and Dimensional that are already doing so. They are already able to do it securely, efficiently and safely with their experience and scale, and we believe that we cannot deliver any more value than them.
Q: How are our investments and fund holdings protected on robo-advisors and digital wealth platforms (34:28)?
Sheng Shi: Very broadly speaking, all legitimate robo-advisors and digital wealth platforms in Singapore should have a MAS licence, which requires that they go through audits by the Singapore regulatory body, ensure that they have a minimum capital, and that there is a segregation between the robo-advisor/digital wealth platforms’ money and clients’ money.
If you look deeper, beyond the licensing, the next key differentiator is how the money and funds are held and invested. There are platforms which hold all their clients' assets together under a single custodian account and then invest these together. This way of guarding customers’ assets is more risky because only the robo-advisor will have the copy of who owns what ETFs and underlying holdings, and also the robo-advisor has the legal ownership of the underlying investments.
On the other hand, there are digital wealth platforms (such as Endowus) which allow clients to have their own custodian accounts, where their investment holdings and cash will be held by their own legal name. This provides security and safety in case the platform were to cease operations, you can hold on to your investments despite the platform becoming defunct.
At Endowus, as with the second case, clients own their assets in their own legal name, and we have an agreement with UOB Kay Hian, the largest broker in Singapore, which authorizes clients to carry on holding their investments in the unfortunate case that the platform ceases its operations.