FSA COMMITTEE
FINTECH FRIDAYS
20th August 2021
Explaining the Rise of Robo-advisors
Robo-advisors are digital platforms that use algorithms to create and manage investment portfolios with minimal human intervention. First launched in 2008 during the financial crisis, robo-advisors was a breakthrough in the traditional finance industry, bringing digital services to a broader audience with low costs, better security features, and diversified portfolio management based on an individual's risk profile, goals, and time horizon.
A typical robo-advisor collects information from clients about their financial situation and future goals through a survey form and uses the data collected to offer financial advice and automatically allocate, manage and optimize the client’s assets.
What is Raiz?
Raiz is a micro-investing app/robo-advisor which provides users with a simple way to get started with investing based on their individual risk appetite. Users can invest into their Raiz account through round-ups, recurring investments, and lump sum deposits. Round ups is a neat little feature that promotes a good investing habit by seamlessly rounding up everyday card transactions and automatically investing these amounts into a portfolio of choice.
Investors have a choice to invest their funds in one of the seven portfolios offered by Raiz, which are conveniently named from the lowest risk for the faint-hearted to the highest risk (which includes a 5% allocation in Bitcoin) for the risk seekers. The portfolios are ‘Conservative’, ‘Moderately Conservative’, ‘Moderate’, ‘Moderately Aggressive’, ‘Aggressive’, ‘Emerald’ and ‘Sapphire’.
The offering of portfolio’s are designed to suit the differing investment goals of investors, in terms of acceptable level of risk and planned time in the market. For example, an aggressive portfolio may suit investors who would want higher returns in the longer term, but will accept a high risk of losing capital over the medium term.
What are the fees? Raiz charges a monthly maintenance fee of $3.50, payable for six of the standard portfolios if your Raiz Investment Account has a value of less than the $15,000 threshold at the end of each month. If your balance is equal to or greater than $15,000, the maintenance fee is replaced with an accounts fee of 0.275%. As for the Sapphire portfolio, users are charged both the maintenance fee $3.50 and the accounts fee of 0.275% regardless of the invested amount. Besides the maintenance fee, users should also be aware of the underlying issuer fee charged by the ETFs that make up each Raiz portfolio.
All things considered, Raiz is definitely a good platform for beginners to dip their toes into the world of investing. Although users enjoy zero deposit and withdrawal fees, the maintenance and or account fees do stack up especially so for accounts with smaller balances. For example, an account with a $1000 balance invested in a standard portfolio would be charged a maintenance fee of $3.50 * 12 = $42 per annum, which amounts to 4.2% of the total capital invested. As for larger accounts, let’s say with a $50,000 balance, the maintenance fee is swapped out for an account fee of $137.50 which is a much more palatable 0.275% paid in fees.
What is Spaceship?
Spaceship is another Robo-advisory trading platform, which allows its users to invest in a choice of three different diversified portfolios, based on the risk tolerance and underlying preferences of the investor. Instead of investing in individual shares, users buy units of these portfolios which represents their fractional ownership.
Through their use of software and in-house expertise, they select shares for each of these portfolios, removing the difficult decision-making process for novice investors. For example, their Spaceship Universe Portfolio invests in shares on the cutting edge of technology, based on their ‘Where the World is Going’ criteria, which looks at the exposure of firms to technological disruption. They also have recently established Spaceship Earth Portfolio which is focused on ethical investing, along with their standard Spaceship Origin Portfolio.
The main advantage of investing with Spaceship is instant diversification, an opportunity for micro-investment and lower fees, which is due to the automated nature of the platform. All portfolios have no management fees below $5000. Furthermore, the spaceship origin charges 0.05% for every dollar above $5000, So, with an account balance of $50000, the annual spaceship origin fees would only be $22.50 per year. There are no transaction or withdrawal fees associated with the account.
The above features are great for new investors looking to grow their balance and not be weighed down by fees. However, it does not yet offer all of the features of a true Robo-advisor in the sense that there is limited choice in terms of investment, which may deter users who have more specific goals. Also, part of the reason fees are so low is because the platform does not hedge against currency exposure, which creates additional volatility in returns and may not be suitable for investors with lower risk tolerance.
Comparison and Conclusion
Compared to other platforms, both Raiz and Spaceship have relatively low fees. Considering the different types of account fees, such as management and transaction costs, Spaceship offers lower costs than Raiz and so may be more attractive for investors looking to minimize costs, particularly on low account balances.
In both companies, users buy units of a portfolio, rather than holding individual shares. While Raiz only trades ETFs, Spaceship instead offers hand-picked diversified portfolios based on their philosophy of investing in the future. Raiz also offers additional trading options, such as cryptocurrency and at this stage has a larger number of portfolios to choose from compared to Spaceship. Furthermore, the ability to contribute Round-Ups to one’s investment is a unique feature of the Raiz platform which builds up a good habit for users who otherwise struggle to set aside money to invest.
In summary, there are many different trading platforms out there that offer their own advantages and disadvantages. It is important to do thorough research and understand the risks and benefits associated with each of these trading platforms before making a decision to invest significant money. However, it seems clear that these low cost platforms will soon overtake their more traditional competitors and the construction of these platforms potentially introduces a whole new demographic to investing.
References:
https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp
https://finty.com/au/investing/spaceship-voyager-review/
https://www.nerdwallet.com/reviews/investing/advisors/acorns
https://finty.com/au/investing/raiz-vs-spaceship-voyager/
The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.