Don't Choose a Roboadvisor That Tells You It Will Beat the Market: Endowus
There are many roboadvisors in Singapore and across the world that you can choose from. What's the difference between them and how should you decide which one to use?
In Part 2 (Part 1 here) of Immortalize's chat with Samuel Rhee, Chairman and Chief Investment Officer at digital advisory platform Endowus, we discussed the key tenets of roboadvisors and issues with some of such providers in Asia.
Providing advice to the masses, easy to use and low costs are key tenets of roboadvisors
Some "roboadvisors" in Asia are essentially fund managers with no prior experience and a marketing gimmick
Active management generally underperforms and not the right way for an individual to invest long term
Q: Can you tell us more about the roboadvisory part of Endowus?
Rhee: I want to separate us from other so called “roboadvisors”.
(Roboadvisors are online platforms that provide automated, algorithm-based financial planning services. The roboadvisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client's money)
We bring advice to the masses, we have great UX (user experience) and low costs, and these are the key tenets of some roboadvisors. More importantly, Endowus gives the masses access to institutional funds, ESG (Environmental, Social and Governance) funds and other great investment options that were previously not available or accessible for individual retail investors.
What a lot of roboadvisors in Asia are doing wrong is that they ended up becoming a fund manager, actively allocating assets and the costs are still really high.
Q: Let me get this right. There is a spectrum of “roboadvisors”. On one end, it’s like a fund of funds where they actively allocate to funds and other assets using some indicators and then on the other end, it’s like an automated financial advisor and you lie on this side of the spectrum?
Rhee: Yes, it’s all about advice and we are what's called a digital independent financial adviser. It's not just about choosing a financial advisor; it is more important to choose a fee-only advisor so that the advisor is not inclined to push funds that will pay them the highest fees.
When you're selling a product, financial advisors should be providing a holistic assessment of personal financial situation. And that's what we hope to do. We don't get paid by anybody except the individual investor.
100% of the trailer fees (fees paid to salesperson by the fund manager) that we receive are rebated back to the customer. We don't keep a single cent and we offer a flat fee to the client for the advice and services that we provide.
This is the clean and transparent way to do business, it's the best way to do it, the right way to do it and is how it is done in the US and other developed markets.
Many of these Asian roboadvisors say, “We have an algorithm that's going to beat the market,” and none of them have ever managed client assets before and a lot of these “roboadvisors” are not doing too well these days versus if you had a passive asset allocation like with Endowus.
What all this in finance is called ‘quant’. It’s been around for decades. There are massive and amazing quant investors like Renaissance Technologies and Two Sigma. They have supercomputers and massive algorithms, and they try to beat the market.
What these other roboadvisors have is an unproven product that is not generating returns. Also, when global fund managers like PIMCO and Blackrock can do this better, why would you want to give money to these robos who have no prior experience?
They just package it in a marketing gimmick to sell it to gullible retail investors at a high cost. There's no robo, there's no advice, and so it really is a misnomer.
Active vs Passive Investing
It is very difficult to beat the market and history has proven that active management generally underperforms and it's not the right way for the individual to invest.
We espouse a very passive strategic asset allocation and investment framework. We offer the advice, access and low costs, and we build portfolios for you with one click. We also have a fund platform where we offer the lowest cost access to funds.
The way to look at us is that we’re a digital private bank or a digital independent financial advisor that you don't have to wait until you have $10 million to go to be serviced. You can start with $1,000 in Endowus now and get the same high-quality advice, access, and cost. It is a cheaper and better experience.
Easy CPF Investing
We make investment easy, have the lowest cost and we are the only platform that can do CPF, cash and SRS, which is all the money that exist in Singapore for an individual. For CPF, we are the first and only digital advisor approved by the CPF Board.
(CPF, or Central Provident Fund, is Singapore's mandatory social security savings scheme. SRS, or Supplementary Retirement Scheme, is a voluntary scheme to encourage individuals to save over and above their CPF savings)
Q: Let’s talk about your unique selling point starting with CPF. You are the only roboadvisor that can do CPF now. How long do you think you can hold the ‘only you can do CPF’ title?
Rhee: We don't want to be the only and we don't mind if others come in. It's just that we're the only ones that invested a lot of money with 20 engineers to really want to solve this problem.
Investing Without Guarantees
We're the ones who are committed to making that change happen, and it was without any kind of certainties. CPF board didn't guarantee us anything.
We had to interact with various government agencies through the process, such as the Ministry of Manpower, CPF, MAS (Monetary Authority of Singapore) and other government bodies. We went through all of that for two years and invested millions of dollars in a technology platform that may not even be used.
We went out there on a limb to solve this problem that we thought was critical to the future of this society and this country.
Q: But once you open the floodgate, isn’t it a lot easier for competitors to come in and offer CPF investing?
Rhee: That's what you would think, but two years later, we’re still the only one. The reason is simple and it’s because of the technology step.
It’s really easy to do cash, meaning, you get clients’ money, you give it to an executing brokerage, they execute in the market and you're done.
Automating Layers of Transactions
For us, we have to deal with the investment agent bank, CPF board, investment administrator, custodian, settlement and funds. Everybody comes together and it's like five layers of transactions, and it's a much more onerous process.
There has to be a purpose-built tech stack and you cannot use a cash tech stack to do CPF. That's why even the biggest banks still can’t do this. That's the biggest problem with financial service and incumbent companies. If it is not easy money, they're not willing to make an investment.
Q: Let’s move on to fees, which is your other unique selling point. Is this going to be your mantra going forward? If someone copies Endowus and offer lower fees, will you match the fees?
Rhee: No, we have to run a business and we are here to build a lasting business.
(Sorry, we tried to ask. ;) )
We're already the cheapest. There's a reason why we place the cost there because we think that is a lasting lowest cost price.
The reason why others are not matching is because they don't think they can get there, or they want to make more money. We're at that threshold where we're not just about making money. There is a purpose driven mission here that we are trying to solve.
A Promise Made
We are willing to price it at a level that we think makes most sense and won’t be affected by others. It's our own cost structure versus our own long-term plan. If we execute on that long term plan, we will turn profitable at this level.
What we promise is that if it makes sense for us and clients, when we have more scale and become more cost efficient, we can lower costs. (There's hope!)
We don't want to be the people who may do well for a short while and then disappear. And this happens in the fund management industry all the time.
Funds live and die through cycles, like fads, and when they disappear, fund managers get rid of it, launch a new fund, and move on.
Q: Who designs the portfolios on your platform?
Rhee: We're not actively tactically asset allocating. We don't have an algorithm that keeps churning the portfolio to try to get better returns and beat the market – and eventually fail as statistically most active manager underperforms.
Some robos have launched with a fund strategy and then due to poor performance, they pulled the fund and no longer offer it. We have a very different philosophy and what we're doing is trying to bring passive, broad-based strategic asset allocation to the portfolio.
All the portfolios are designed by me, the Chief Investment Officer, and the team in the Endowus Investment Office.
We use algorithms to optimize and re-balance the portfolio optimally. We use algorithms to do transactions and all the online things but it's not to beat the market, it's to make it efficient and enhance outcomes, and lower cost.
Q: Under what circumstances will Endowus re-balance the portfolio?
Rhee: When the portfolio diverges away from the strategic asset allocation by more than 10%, or whatever the optimal threshold is. The rebalancing usually happens less than one time a year.
For example, in March 2020, the equity market fell first. If you were in a 60-40 portfolio, 60% equity and 40% bonds, your bonds held up relatively well and equities fell, we would have re-balanced by selling your bond and buying your equity, back to the target allocation.
Then what happened was equity kept falling and bonds fell just as much in that second leg. At that time the weight wouldn't have shifted.
After that, equity rebounded massively and bonds rebounded a little, so that re-balancing algorithm worked beautifully, because you would have made that shift, and you would have benefited from that.
This interview has been edited for length.
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