Robo Advisors in UAE: What Are They and Which Are the Best Ones?

As technology continues to seep into everything in the 21st Century, even investors are turning towards low cost softwares that help with investing. These software products are known as robo advisors. They have quickly become very prevalent in the UAE. Learn about what these products have to offer and whether they’re right for your investing strategy.

What are Robo Advisors and which are the best ones available in the UAE?

Basics of Robo Advisors

Investors today can build and manage their portfolio in one among three main ways:

  • Hire a financial advisor to make an expertly curated portfolio.
  • Use a do-it-yourself approach to pick investments.
  • Enlist a robo advisor to place a portfolio together.

Robo advisors are software products which will assist you with managing your investments without the necessity to consult a financial advisor or self-manage your portfolio. You usually open a robo-managed account, then supply basic information about your investment goals through a web questionnaire. Robo advisors then crunch the data you provide to provide an asset allocation approach and build a portfolio of diversified investments for you that meets your target allocation percentages for those investments. These incredible tools are available with ease across the UAE.

Once your funds are invested, on an ongoing basis, the software can automatically rebalance your portfolio—that is, make the changes to the investments needed to align your portfolio back to a target allocation. Some robo advisors can even sell certain securities at a loss to offset gains in other securities—a process called tax-loss harvesting that can help reduce your tax bill. 

Who Should Consider Robo Advisors

Robo advisors can be a great solution for the following types of investors:

  • Beginner or young investors: These investors might not yet have the financial knowledge needed to form informed investing decisions but could also be comfortable managing their portfolio online with limited or no human assistance.
  • Professionals: These individuals tend to be extremely busy and lack the time to actively manage their fund. Hence placing their portfolio on “autopilot” with the help of robo advisors is ideal. Investors with simple strategies: In case your asset allocation is simplistic (for example 70% stocks, 30% bonds), constant guidance from a financial advisor is not necessary and a robo advisor should suffice.
  • Investors who don’t want to hire a financial advisor or go at it alone: If you don’t have the assets or the desire to hire a financial advisor, but no longer wants to select investments on your own, you may want to choose a robo advisor to select investments, rebalance them, and place trades on your accounts.

In contrast, an automated portfolio-management solution is not ideal for these types of investors:

  • Investors who prefer human assistance: Some robo advisors offer live assistance (this usually costs slightly more), while others interact with you almost exclusively through the web. If you would like hand-holding or a well-known voice to speak to, a robo advisor is perhaps not for you.
  • Investors with multiple investment accounts: Some investors may have to coordinate company benefit packages with other accounts, which makes automation offered by robo advisors less suitable.
  • Investors who need a tailored approach: Robo advisors won’t offer customized planning or advice on what proportion to save money.

Benefits of Using a Robo Advisor

There are a couple of key advantages to outsourcing portfolio management to software:

  • You can avoid investing mistakes. It has been documented many times over that one of the biggest reasons investors get poor outcomes is because of their own behavior. Investors make emotional decisions at market highs, market lows and gut feelings. Software doesn’t make these kinds of mistakes.
  • You can automate the process. Upon opening your account, the robo advisor will go on to handle your entire investment process. You don’t have to worry whether you should make changes to your portfolio or invest more or less in a given market sector. You don’t even have to log in to the account and place trades.
  • You can invest a smaller amount at a lower cost. Advisory firms generally require a higher amount to initially invest and impose fees that are often higher than those charged by robo advisors. What’s more, you don’t have to worry that a broker or other financial salesperson is making a recommendation that isn’t in your best interest.

What are the usual Robo-Advisor Fees

You’ll generally pay these digital advisors a service charge which will be structured as a hard and fast monthly fee or as a percentage of assets. With robo advisors that charge a fixed monthly fee, the fee typically ranges from about US$15 per month to US$200 per month depending on portfolio value. With a percentage of assets structure, you’ll see fees in the range of about 0.15% to 0.50% of your account value per year. For example, if your portfolio is worth US$100,00, 0.50% of that would be just $500 per year.

You also pay any expenses related to the investments employed by the robo advisors. For example, mutual funds and exchange-traded funds have expense ratios. This type of fee is taken out of the assets of the fund before returns are distributed to investors.

Investments in a Robo-Managed Account

Most robo advisors use mutual funds or exchange-traded funds rather than individual stocks to build your portfolio. They typically follow an index fund or another passive investment approach based on modern portfolio theory research, which emphasizes the importance of your allocation to stocks or bonds.

With your asset allocation determined, you’ll specialise in the underlying stock asset classes for your portfolio, like large-cap, small-cap, or international stocks. Then, you’ll choose the underlying bond asset classes to incorporate, like short, intermediate, or long-term bonds. A robo advisor can do all of those tasks for you.

How Taxes Work for a Robo-Managed Account

Your tax liability for assets managed by a robo advisor depends on the type of account in which you hold the assets:

  • If you hold your assets in a tax-deferred retirement account, you pay no tax until you take a withdrawal. Rollovers or asset transfers from your existing account to a robo advisor generally do not count as a withdrawal.
  • If you own investments in a taxable account, then you will pay taxes on earnings. You’ll receive a form each year that reports the interest, dividends, and capital gains on the investments. You will need to report those on your tax return and pay tax on these types of investment income.
  • If your robo-managed account allows you to transfer in existing investments, those investments may be sold and incur a tax liability. Existing investments are going to be sold first unless they’re investments already utilized in the robo model portfolio. If these investments are not inside retirement accounts when they are sold, any capital gains (or losses) will be realized, which may result in a tax bill.

Are Robo Advisors Worth It?

Robo advisors offer tools that can help you build and manage a diversified portfolio and project how your accounts will grow over time. As they often accompany lower fees and account minimums than traditional financial advisors, they will be an honest option for investors who don’t need to hand over a lot of cash to a financial advisor or spend the time or effort required for self-directing investing.

While often equated with digital financial advisors, robo advisors aren’t financial planners. They can’t provide the customized solutions that are often needed for unique investing strategies. In addition, once you’re near retirement, the allocation models utilized in the robo-advisor tools might not assist you with aligning your investments with the withdrawal phase. For this reason, interested investors may benefit from using a robo advisor earlier in their career and seeking the services of a professional retirement income planner as they advance in age.

Robo Advisors in the UAE

The United Arab Emirates (UAE) is projecting a strong growth in the digital financial advisory segment. Business-to-consumer (B2C) solutions are rapidly gaining traction from the general public , business-to-business (B2B) robo-advisor providers are emerging as key enablers for banks and financial institutions, enabling them to quickly deploy powerful platforms.

The UAE market is poised for growth

Hasan Heider, partner at 500 Startups, a risk capital firm says that a lot of the pre existing wealth management and banking efforts of the Middle East are primarily focused on high and ultra high net worth individuals. This provides a massive opportunity for digital financial advisory platforms to fill the gap.

“A lot of investors don’t qualify for these wealth management services, and it hasn’t been cost effective for banks to really provide those services to the ‘mass affluent’ market,” Heider told The National.

One of the best robo advisors in the UAE is Wealthface. It offers both sharia compliant and sharia non compliant investment options to serve all kinds of investor needs in the UAE.

Another robo-advisor that has gained considerable traction in the UAE is Wahed Invest, a company founded in the US that offers a Sharia-compliant digital financial advisory platform aimed toward Muslim investors. In November 2018, Wahed Invest raised $8 Million in funding after being valued at $100 million.

George Triplow, wealth and asset management leader at Ernst and Young, said that robo advisors can be great at serving the section of population with low earnings and a smaller amount of assets.

“Historically, there have been two main groups of clients within the Gulf Cooperation Council (GCC) who have investable assets: GCC nationals and high-income expatriates,” Triplow said. “However, a 3rd group is emerging that’s attractive to wealth managers and personal banks: the affluent segment of upwardly mobile millennials who want to transact business during a different way and communicate with advisors during a different way.”

Why banks must get moving

As robo-advisors make inroads into the UAE, banks and traditional financial institutions too should be looking to make their entries into the field.

In the UAE, several banks have begun partnering with tech companies to supply robo-advisory services. An example of that is NBK Capital’s digital investment service NBK Capital SmartWealth in Kuwait, which the firm developed together with Neo Technologies.

But within the UAE, financial institutions are somewhat slow to awaken to the trend. Yet, with a young, tech-savvy population, growing wealth, and a rising bourgeoisie, robo-advisors within the UAE are poised for a major boom in usage.

In addition to convenience, affordability and being accessible 24/7, robo-advisors can provide an alternative to the boring long-term savings plans and a much easier entry into the world of passive stock investing considering that most these automated financial planning services offer to invest in exchange traded funds (ETFs) and index funds.

Belgian experts Investsuite have offered software solutions that give financial institutions the opportunity to swiftly offer robo-advisor and similar digital investment products. The company provides a set of white-label wealthtech products-as-a-service that has a robo-advisor, a trading platform, and a “portfolio storyteller” that simplifies portfolio reporting and cuts through the financial jargon.

Investsuite’s “robo-as-a-service” solution allows banks to launch their own robo-advisory product during a cost-effective and timely manner. The solution is flexible and can be implemented and configured in a number of ways including as a fully stand-alone product with dedicated mobile app as well as having the ability to be integrated with an online brokerage service. It can also be integrated with the bank’s mobile banking platform.

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