What if investing were as easy as online shopping? Let’s explore how to invest with robo-advisors.
"Where do I start?" When I talk to women about money, this is one of the most frequently asked questions. Investing and talking about money is especially important to women, but that’s a big question.
Where do you start if you want to make your money work for you, but you don't have millions at your disposal? The jungle of financial abbreviations, data and jargon is huge – like the range of financial products.
Even after all my years in this field, I still see it as a badly organized supermarket. All the products are higgledy-piggledy and labelled in hieroglyphics.
One good place to start is with a financial adviser. But financial advice doesn’t come for free. It may be tied to a certain level of investment – and paying for it directly only makes sense if you’re planning to spend a hefty amount. Then you need to investigate how independent your experts really are.
Of course, you can simply start by yourself – maybe with a fund savings plan or exchange traded funds (ETFs). SwissFundData, for example, offers an overview and product comparisons. But this would mean that you wouldn’t have an investment strategy – and researching and regularly updating your portfolio is rather time-consuming.
Robo-advisors are a good alternative to personal consultation or experimenting by yourself.
These are digital applications that make investing as similar, and almost as easy, as online shopping. The robo-advisor (or rather the algorithm it uses) virtually replaces a human advisor, offering a cost-effective way to build and manage your own portfolio.
This is how it works:
- You’ll need to fill out an online questionnaire, describing parameters like how long you want to invest your money for (your investment horizon) and how much risk you’ll accept (your risk profile)
- The robo-advisor calculates a suggested portfolio from the information provided
- If you're satisfied with the results, let the robo-advisor take over...
- ...and open an account with the relevant depository bank, which invests, manages and regularly adjusts your portfolio for you, according to the robo-advisor’s instructions
I imagine it to be like online shopping, where the computer creates an outfit based on specific information, size and colours to suit the occasion. Maybe not as much fun, but in principle the robo-advisor is pretty similar.
Please note: if the robo-advisor you’re using becomes insolvent, it won’t affect your money - that "sits" with your depositary bank (a financial institution that looks after the money in a investment fund, safeguards the fund’s assets, and oversees how the fund operates), not in the digital tool.
Does investing with a robo-advisor really pay off?
A Swiss study has shown that robo-advisors outperformed strategy funds by around 2% each year (after costs) in the period from 2000 to 2018 – that’s not bad at all.
When would it be suitable to invest with a robo-advisor?
- If you’d like to find out what kind of portfolio might suit you and your risk tolerance quickly and easily.
- When you have little time to deal with your portfolio.
- If you’re looking for an inexpensive alternative to traditional investment advice.
- If you want to start with smaller amounts – although even a robo-advisor starts at 2,000 CHF, which is still a fair amount. For those looking to invest less, there are ETFs, or fund savings plans, which can start from CHF 20 per month.
- If you value discipline and transparency – your robo-advisor acts according to strictly defined rules, reducing emotional investment behaviour, and is usually transparent about what you’ve invested in, and the return generated.
A robo-advisor is less suitable, if you want to invest your money in the short term, e.g. less than 5 years, if you prefer human advice, or if you want to build a complex portfolio with a lot of money.
More about robo-advisors in Switzerland
In Switzerland, robo-advisors are still a niche product, with only around CHF 300 million in assets under management. In comparison, robo-advisors manage 27 times that amount of assets in the UK. Nevertheless, Switzerland has an active range of products on offer; more and more banks are using these tools as a supplement to traditional advisory services (known as the hybrid model). The competition is fierce, so expect the number of providers to consolidate into about four or six. The best in Switzerland (May 2019) and a ranking of the best in the world (Nummo 2019) can be found here. You can order a free list, with price comparisons, at moneyland.ch.
7 things to bear in mind when choosing your robo-advisor
- The investment strategy and its success, e.g. how much money does the robo-advisor already manage and what are its returns?
- Service and scope: which databases and methods does it use to select products? How do you get help and support?
- Fees: is there a flat fee, does the fee depend on the investment amount, or are there additional costs, e.g. if you make changes to your portfolio? The average fee is about 0.68% in Switzerland. (This is the perfect time to read all the small print!)
- Portfolio changes: how and when will the robo-advisor adjust your portfolio and what are its criteria? Does it require your approval or can it make changes automatically?
- Minimum investment: what’s the minimum amount of money needed to get started? For Swiss providers this is between 2,000 and 10,000 CHF.
- Which depositary bank does the robo-advisor use and what protection does it offer?
- What do you know about the tool? Who made it? What technology is used? Has the algorithm won any awards, or shown up in other rankings?
These digital financial assistants make services that were previously reserved for only a few people – mostly the wealthy – more accessible to all. You don't have to invest all your savings right away, but it's worth a try - because in the long run what costs the most is doing nothing with your money. Give it a go!
This article has been produced in partnership with watson, a Swiss news platform.
Here is the link to the original blog article in German.