How Should You Think About DIY Investing vs Robo-Advisory Investing?

If you’re just starting out on your investing journey, it can sometimes feel like a baptism by fire—not exactly pain-free but you’re learning stuff along the way.

One of the biggest minefields out there in the investing landscape is the sheer amount of platforms and products out there. They can seem as common, or numerous, as closet “Swifties”—in other words there are loads!

We can broadly break down your investing options, when you first get going, into two buckets; do-it-yourself (DIY) investing that’s driven by brokerage platforms and robo-advisory platforms (where you outsource the investment decision-making process).

Of course, if you ever start making the really, really big bucks—and can meet some crazy minimum investment amounts—then the private banks will also start trying to vie for your business (and dollars in those juicy fees).

But for now, let’s focus on the DIY and robo-advisory options as these are what everyone has access to and they also typically offer up the best long-term value.

 

How Should You Think About DIY Investing vs Robo-Advisory Investing?

1. What is DIY investing?
2. What is robo-advisory investing?
3. Understanding fees for DIY and robos
4. What’s the “right” path?

 

1. What is DIY investing?

As described, DIY investing is pretty much in the name. The whole “Do-It-Yourself” is normally used to refer to those of us who like to fix or do things in our homes, although in Singapore that’s probably not all that common given how many of us are willing to pay for someone to put together our IKEA furniture!

Regardless, DIY investing has become much, much more popular in the past decade as trading commissions have come down substantially and technology has improved.

In essence, that has allowed for a more widespread “democratisation” of investing among the mass retail crowd (i.e. me and you). For example, the US is the world’s largest stock market and commission fees per buy/sell trade have come down substantially, including in Singapore.

While some of the legacy brokerages—like DBS Vickers—can still charge up to US$27 for a sell transaction in the US, many of the brokerage platforms out there are much more competitive. That’s because technology and liquidity have made the costs of trading in the US much cheaper over the years.

Many examples of these types of lower-cost brokers exist in Singapore and they’re very popular for those of us who want to invest ourselves. There’s Interactive Brokers, moomoo, Tiger Brokers, Syfe, Webull, ProsperUs, FSMOne, and Phillip Securities (POEMS) to name just a handful.

 

Falling trading costs and the rise of ETFs

Nowadays, you can actually have commissions rates in the US market be close to free or cost as little as US$0.35 per trade. That’s just a littleeeeeee bit less than the US$27 most people would have been forced to pay a decade ago!

Those low costs have been combined with the rise and popularity of exchange-traded funds (ETFs). As we know, these are super low-cost products that are traded on stock exchanges and which give us broad access to global stock markets.

The best thing about them is that they just track a stock market index, for example the S&P 500 Index in the US. It’s both simple and cheap but the added bonus is these products typically beat the long-term performance of unit trusts, which are managed by a team of investment professionals!  

Given all the benefits of ETFs, and the rise in the number of ETFs listed globally as well, the amount of money they manage has been off the charts. Back in 2011, according to ETFGI Consultancy, global ETFs had assets under management (AUM)—basically a fancy term for how much money were in them—of US$1.5 trillion. By the end of last year, that number had jumped to US$11.6 trillion, nearly a nine-fold increase!

ETFs, which are dubbed “passive” investments, have been great for individual investors who want to buy low-cost investment products by themselves.

 

2. What is robo-advisory investing?

Robo-advisory platforms are named so because some—though not all—attempt to use automation to construct investment portfolios. However, many are just utilising technology to build platforms that can provide more risk-based investment portfolios for individuals.

You know when you see those portfolios or investor profiles that are named “Aggressive”, “Cautious”, “Defensive”? That’s you basically saying “No thanks, I don’t want the hassle of having to think so much about growing my wealth and I’m happy to delegate the whole process to a platform”. And that’s totally cool.

Because the simplicity of it is that there are model portfolios built to suit your risk appetite and investing time horizon. In other words, they are there to try to build strategies for you to achieve your aims with the appropriate amount of investing risk attached.

 

The robo options in Singapore

Three of the biggest robo-advisors in Singapore are Endowus, Syfe, and Stashaway. If we take Syfe (which is also a brokerage platform) as an example, they have portfolio offerings like Core Growth, Income+ Preserve, and REIT+ that cater to different types of investors.

Similarly, Endowus offers six different flagship portfolios to its users that range from “Very Conservative” (100% bonds) to “Very Aggressive” (100% stocks). They also offer a range of additional thematic portfolios for those that want a different type of investment exposure.

Meanwhile, Stashaway says it has an investing framework that it proprietary and managed by experts. It also offers various thematic and income portfolios for investors to choose from.

These are just 3 of the biggest but there are other providers like AutoWealth, OCBC RoboInvest, and Kristal.AI. By providing the platform, technology, and investment expertise, the robo-advisors allow any of us to start investing with small amounts of money. You can set up monthly recurring investments to help you meet your long-term investment goals.

 

3. Understanding fees for DIY and robos

It’s really crucial we know how much we actually pay in fees for either DIY investing or going down the robo-advisory route. That’s because—like the whole overused cliché of “compounding”—fees also compound given the typical approach to charging us as consumers is to take a percentage of our assets every year.

So the fee we pay on our investments, whether it’s to an ETF provider (say BlackRock’s iShares/Vanguard) or to a robo-advisor, is something that is charged annually to us—sort of like a subscription.

Breaking these down is pretty simple. We can sum it up as; DIY investing (with regards to purchasing ETFs) has one layer of fees and robo-advisory has 2 layers of fees. Why’s this the case?

 

Fee layers

Think about fees in 3 ways when investing. First, buying the company of a stock on a brokerage platform only sees you part with a commission on the trade. Holding the actual stock year to year costs you nothing.

Next up is the route of buying ETFs via your brokerage. Here, you have to pay a small annual management fee to the ETF provider, whether that’s iShares, Vanguard, or State Street (SPDR). Typically, on the largest ETFs, these annual management fees can range from 0.03% up to 0.25% of the amount you have invested.

Above that are robo-advisors, where you pay both a management fee to them (to finance portfolio construction, fund technology etc.) and also to the underlying fund provider of what you’re investing in. Many of these robo-advisors charge you less of a percentage, the more money you have invested with them.

For example, Endowus charges 0.60% per annum (p.a.) on its core/satellite/income portfolio accounts with less than S$200,000 while it charges 0.25% p.a. for those same accounts with more than $5 million. Say you have less than $200,000 invested with them, you’d have to pay the 0.60% p.a. fee plus the underlying fund fee, which can range anywhere from 0.08% all the way up to 1.05%.

All in, you could be paying total annual fees (platform + underlying funds) of upwards of 1% or even 1.5% when using robo-advisors. Of course, the outsourcing of this portfolio construction and decision making is a cost that individuals make. It may make complete sense to you to pay the two layers of fees to save the trouble of building, say, a portfolio made up of various ETFs.

 

4. What’s the “right” path?

In the end, it’s very much down to an individual’s preference. Outsourcing the portfolio’s construction to robo-advisors saves us the time and effort involved in researching which ETFs are appropriate for us and our goals. When people start uttering the words “tracking error” or “sharpe ratio” when talking about investing, the majority of us switch off or zone out.

However, if you want to be more directly involved in how your portfolio looks and you’re interested in the nuances of investing then going down the DIY route could make sense. The added bonus is that you will save on the extra layer of fees.

Of course, this all very much depends on you buying broad-based, globally-diversified ETFs that hold hundreds (if not thousands) of individual stocks. Whatever route you do go down, ensure you’re well aware of the fees involved and what exactly you’re paying for.