In this episode of the Bid and Ask series with us here at DrWealth, we talk to the man who saw a gap in the financial industry here in Singapore and filled it.
We have the opportunity to talk to Michele Ferrario. He is the co-founder of StashAway, through which he brought the presence of Robo advisors here in Singapore and has since given people financial opportunities and knowledge.
How Did StashAway Start?
StashAway started a year and a half ago. However, the inspiration came from when Michele faced a problem with the accumulation of his cash.
But long before that, Michele has been working in the financial industry. Michele spent the first half of his career in and around financial services. He was advising banks when he was a consultant at McKinsey and then was an investor in private equity for a few years.
In the second part of his career, he built a few Internet companies through a group he was a part of called, Rocket Internet. And in the last four years before launching StashAway, Michele was the group CEO of a company called Zalora.
And so he started StashAway during his four years in Singapore as the CEO of Zalora. He recalled how he had the problem of accumulating cash in the bank account when he was saving money.
However, he didn't find anybody who was willing to help him invest the money he had. What they did instead was sell him incredibly expensive unit trust or investment-linked products, which he refused to buy.
So he ended up continually accumulating cash not until he found out about the existence of robo advisors in the US. This was in early 2016. He was still with Zalora and decided to look for a robot advisor. But upon googling “robo advisor Singapore”, he could not find any. That’s when he got the idea of creating StashAway.
And that's when I started thinking, maybe rather than solving my own problem of how to invest my money, I can actually solve the problem for a number of people I've talked to over the years that told me: “yeah I don't know what to do with that”. That's how when I decided to look at it.
The real decision finally came when he met his two co-founders: Nino Ulsamer, the Chief Technology Officer, and Freddy Lim, the Chief Investment Officer. Together, they brought to the table experiences in a lot of important areas.
Freddy comes from close to 17-18 years as an investor; was a managing director at Nomura; and brings to the table real experience investing billions and billions of dollars for sophisticated institutional investors.
On the other hand, Nino brings to the table close to 15 years of experience building technological companies.
Adding Michele’s familiarity with Singapore through Zalora, StashAway was realized. And now, a year and half later, things are moving on.
On Identifying the Gap in the Market
Michele also shared about how he identified the gap in the market, which he saw as a real problem. He said:
It is impossible that in a place like Singapore, if you have two or three hundred thousand dollars or one or two million, you get served by a premium bank and they will assign you a relation manager and they will just try to sell you and transfer the crazy high fees.
Those things, he refuses to do. And so he saw it as a huge opportunity to actually help customers build their wealth in a way that makes sense through the use of technology.
He said how technology has changed so many aspects of our lives. And yet for whatever reason, it has not changed a lot how we manage our savings. In fact, you can actually do so much with it. It can make our financial tasks more convenient, make it simpler and very importantly make it much more intelligent.
What are the Difficulties Faced by the Investment Industry?
There are a number of things that made the current situation a struggle in relation to how the financial industry is serving both the retail and enduring investors. So we asked Michele his thoughts about this. He gave us these important factors:
Fees are important to consider. Most especially in investing where you are buying returns and where many institutions have high fees. He gave as an example buying a car.
When you buy a car, you usually expect a better car if you pay more. However, investing is not since you are buying returns instead. So every level, every 1% fee or more that you pay, you actually reduce your returns.
So ultimately, in investing, it's the one product where fees actually have part to the product. And having high fees means less returns.
For Michele, the most important thing is the intelligence underneath the investment that you do or the investment framework that you buy. But during his search in Singapore, he was surprised that there was nobody that provides this. This is based on his many talks with few financial advisors.
He found how nobody tried to think about the key questions like:
- Who the person is?
- What is their actual situation?
- How does a portfolio look like?
- What is the right level of risk?
- What or how can someone change their portfolio over time among different asset classes, different geographies, different issuers of bonds?
These questions, however, only fall under the level of sophistication that was made only for institutional investors and high-networked individuals and family offices.
Lastly, is the simplicity. As mentioned, even with the advent of technology, not many took it as an opportunity to make things convenient.
The simplicity lies in the fact that you can take your phone and know that in two clicks you can understand what's happening to your portfolio and make sure that everything is under control. This is obviously an added advantage.
Overall, addressing these things aim to create a model that was not given to customers before. Michele admittedly said that doing this and offering it in high quality is very difficult.
The reason for is that it’s just very expensive. It maybe can be done for customers who have millions of dollars with them.
Which is why he also pointed out how technology can help bridge that gap and make it easier. The point is building a product that is more sophisticated, that is more personalized, and that over time will reduce volatility of whatever portfolio—whatever your reach profile is—and increase and maximize the returns at that level of volatility.
About Their Relationship with Advisers
With that, we then asked Michele about their relationship with other advisers who might see their presence as a threat.
He was very candid when he said that there are actually a lot of sophisticated advisors who are actually reaching out to ask for collaboration. He then mentioned those few in Singapore who do what is called fee-only based advice.
These people don't get commissions from the program manufacturers. Therefore, they are not biased like most advisors will be. Rather, they try to sell you a product and give you a financial plan or an estate plan or a tax advice for a certain fee.
And these advisors are the type of people that are reaching out to StashAway expressing their interest with doings things together.
On the other hand, Michele also mentioned how they still don’t have that type of relationship yet with the more kind of general population advisors.
How to Get Singaporeans to Invest
According to Michele, one of the biggest problems in Singapore is that people do not invest in any way. So 36% of financial wealth owned by households in Singapore is in cash on deposit. This is an issue.
In response, StashAway is trying to help people get that money to work for them like: get the money to build a retirement plan, get the money to make sure that they can pay education fees when the kids are 18 years old, and more.
So how can they do this and get Singaporeans to invest? Well, he gave us two things:
Making It Easy
This first one is inherent in the product or application. And to make it easy, StashAway allows users to open an account with them in just 15 minutes. And once they open an account, they can then build an investment plan where they have standing instruction for their bank. And they can do two things:
- In theory, they can just relax and do nothing.
- In practice, they can just check and take it from there.
Doing A Lot of Education
The second thing that StashAway does is giving a lot of education by way of seminars. Here they explain and teach the basics about the financial industry. Some examples are:
- Why does it matter to start early?
- What is compound interest and why does it matter for every investor?
- What is an ETF and why are ETFs a good tool i.e. STI ETF to get exposure to a variety of asset classes?
- Why dynamic allocation makes sense?
How to get those who are Already Investing to Consider Robo Advisors
Aside from the Singaporeans who still haven’t given investing a try, we asked Michele for his take on those who are already investing but still have not considered robo advisors. Like the one above, he gave two answers.
Consider Buying the Index
To explain, he gave us a couple of numbers:
In the last 15 years, 93% of US large cap equity funds have underperformed the S&P 500. If you look at mid market, 94%. Small cap, 95%.
So you have 1 in 20 odds to get a professional manager to select stocks and make more money than the index. If you are a non-professional manager, meaning that you do this in part-time, the odds will be even worse.
So if it goes from 1 and 20 to 1 and 40 or 80 maybe, considering on buying the index is not a bad idea.
Deciding on Equities
The second point is, in reality, it's demonstrated that 80% of returns in portfolio come from asset allocation not from security selection.
So it's much more important to decide where you want to have 10% US equities or 20% or 5% gold or 15%, then to understand in US equities whether to buy Apple, Amazon or all of them. And the answer should be all of them.
These two are actually part of having a more kind of holistic and sophisticated approach to investing.
Nevertheless, Michele also acknowledged the fact that investing can be fun sometimes. So in StashAway, they keep you aware with a part of your portfolio that you can use to see if you can beat them over the next year and so on.
Still, he personally thinks that the core part of your retirement plan, your kids education plan, and the like are better managed by using passive and very diversified instruments and building a smartest allocation on top of it.
On Re-balancing and Risk Management
More than what is mentioned above, StashAway also offers more for those individual investors who spent too much effort in monitoring and rebalancing at the right time.
Rebalancing makes sure that the risk target is always constant. And therefore, if one asset class over performs other asset classes—meaning moving over time the overall balance that portfolio and the overall risk of the portfolio—StashAway buys and sells their securities to make sure you go back to your target allocation.
That has the benefit of keeping the risk constant at the risk level. This is basically because of the timing and the risk preferences. Together, the customer will have a great on. And this is done automatically by StashAway’s platform.
Furthermore, it's not done periodically, which is far from what most people do. People tend to do it quarterly or semi-annually or annually. This is wrong because it is like taking a bed on a day in the market. And according to Michele, it's just not the right thing to do.
So what they do instead is let the machine check daily and then perform the rebalancing anytime. Any asset class is away from its target by a certain threshold. The threshold differs across asset classes depending on the volatility. This is demonstrated in a bunch of academic papers that actually find how it's the right balance between letting the good asset class perform for some time and then take profit without other trading and without time in the market. In short, that's rebalancing.
Dynamic Asset Allocation
The other thing that StashAway have is a dynamic asset allocation. So it is not static, meaning they don't tell their investors to look at certain specific goals like having 5% goal for the next thirty years.
The reason for this is the economy. It is the ultimate driver of mid-term performance for every asset class. You want as an investor to have a portfolio that is in sync with where the economy is.
So for instance, in a recession you may want less equities than when the economy is doing well. For debt equity, you may want to be more exposed to consumer staples than to technology. These are the more defensive sectors.
So all those things are part of StashAway’s investment framework. Adding to that is how they automatically re-optimize portfolios of their customers, of course as permitted. They give their customers an option to decide whether they want StashAway to do it automatically or if they want to have the last say.
But even with that, Michele shared how most 99 point something percent actually select the automatic option.
Therefore, StashAway does it automatically so as to try to maintain risk constant in a recession where there is higher volatility. The risk spikes up if the customers don't change their portfolio. They maintain risk constant and change their asset allocation. This is to ensure that the customers do as well as possible in recession.
What is Unique about StashAway?
So we asked Michele about some of the unique propositions that StashAway is giving as compared to the rest. Here are his answers:
Sophisticated Investment Framework
When you invest with the robo advisor, you mind returns. So the most important thing you need to understand is how will they invest your money. And this is where StashAway’s sophisticate investment framework comes to play.
Their investment framework runs on economic regime logic. So they use economic data to create the location decision. As Michele mentioned, they have a layer of valuation adjustments, which works to actually under or over weigh different asset classes depending on where the asset classes is in the cycle.
On top of that, they have a risk shield that is applied on to all of this to make sure that the capital is protected for the customers.
Behind all of StashAway, there is a lot of experience. As what Michele mentioned, the co-founders of StashAway has brought in incomparable experiences to the table.
Freddy Lim, his co-founder, has 17 years of experience managing large amounts of money.
Also, Michele named one of their advisors: Pranay Gupta. He is the former head of Multi-Asset Strategy at Temasek. He was a Chief Information Officer Asia for IMG, managing 80 billion US dollars.
So these are all people that have managed a lot of money for very sophisticated investors.
And that's how StashAway built the framework:
We build something very sophisticated. There is nobody like that—not just in Singapore, but I would guess probably globally that have kind of build something as sophisticated and brought it to an investor for very low fees and no minimum balance.
This brings us to the third one.
This is one of the most important points. The fees depend on how much is invested. Michele declared how they are in the middle ground, which is a bit higher and a little bit lower than the rest.
So for higher amount, he said they are cheaper as well as for small and mid amount. However, he was honest how even though fees are important, it’s not the most significant one. It's not the 0.1 plus or minus that matters, according to him. He said:
“Cut out the 1.5 percent and then select what you think is the right investment logic.”
Michel also added that StashAway’s platform is already top notch in terms of usability—both on the web as well as on the app. In fact, they are actually the only player in Singapore with Android and iOS apps.
“And this is just the start. We just invest in much more than everybody else. So the gap is just gonna increase over time.”
What are the Safeguards of StashAway
Robo advisory is probably still quite new in Singapore unlike the US. The people there are a lot more comfortable with it. Thus for Singaporeans, going in to robo advisory may seem like a risky endeavor.
So we asked Michel about what are some of the safeguards that StashAway have in place that can switch some of the investors or prospects who may have some fear in trying out their product.
Monetary Authority of Singapore Regulated
First of all, StashAway is regulated by the Monetary Authority of Singapore. They hold a CMS license for retail fund management. This is actually rather different.
They are the only robo advisors in Singapore that homes in the company a CMS license. And that is by itself a big safeguard for investors because it requires the company to comply with higher standards that MAS puts forward including:
- Quarterly reporting
- Tech audit
- Compliance audit
- Financial audits
- Very high minimum capital requirement
- Custodian setup
That last thing is maybe the very important point to stress. Customers’ money is always in custodian accounts with HSBC and Citibank.
What it means is that in the event that StashAway were to have issues and go bankrupt for instance, the customers money will be completely safe. It's completely separated and stays with Citibank and HSBC. That's part of the regulatory framework of MAS and it's obviously the right thing to do on top of it.
Compliance Tin In-House
Moreover on their side, StashAway also has internal safeguards. So because of their CMS license, one of the things they need to do is have compliance in-house. So they have compliance tin in-house, which is another difference versus other licenses.
And this makes sure that there is a person whose job is to make sure that the company is completely tied in the things that they do. Michel gave us an example:
For instance, one of the things that we do is the algorithm, the asset allocation algorithm, and the trading execution that are actually not directly connected. We are on purpose an investment committee in the middle, which sits and reviews the data before trades are made. And that's done on purpose as a risk mitigation effort. Plus we have a number of kinds of things that we have done to make sure that risk is under control.
Another thing that StashAway has is the risk shield.
So StashAway monitors markets and macroeconomic data daily. And while they believe in an economic driven model, they are not trying time correction.
Michel said that in February, for instance, they did not try to know when the correction starts and when it ends. The simple reason is just it is not the right thing to do because it is impossible.
You may get it right once. However in that second time, you may get really burned. So that's not what they try to do. But what they try to do instead is this:
If there is a real bear market, they use economic data to anticipate it because that's usually driven by economic data. And in case the economy data have not anticipated, they actually have the risk shield monitors moving that involves a number of different parameters such as leading economic indicators and market data.
The all-weather type of strategy is not the recession strategy nor a growth strategy or a stagflation strategy. It’s an all-weather strategy, which is built to work decently well in uncertain conditions when you don't know where things are going.
Basically, it is a transition portfolio. It's a portfolio and until things are not clear—hand it's not clear whether the market is going back to be positive or negative—they stay there. So that's something.
Also, it is pointed out that again it's a continuous process. So this can happen any day of the month and StashAway moves immediately. The portfolio's there to protect people's capital.
Risk Shield and the 2008 Financial Crisis
Here, we actually brought up the 2008 financial crisis. After this event, we noticed how the markets in US, Europe, and Asia seem to be disconnected.
As in the US have gone up a bit new highs year after year. However, Asia is still not even reaching the highs, for some of the countries. And we recently read that Europe just has some signals that there was a death cross.
So our question was: if let's say in this kind of scenario where there's only one particular region where they have this death cross but the rest of the other regions have not experienced this, how would that risk shield work?
Michele answered regarding to where the risk shield looks. First and foremost, he said that it looks at the US market because those are the ones that can actually tend to lead other markets. And then they have secondary checks on each of the markets where they invested in.
However, one thing Michele wants to stress is that they don't look at small corrections. So one death cross actually says nothing. Rather than that, they actually look at multiple death crosses. So it's a bit more analytical than that. There are a variety of different things that they look at so as not to overreact.
Advice to Undecided Investors
With his years of experience working under the financial industry, Michel has definitely encountered, and talked to a lot of other investors. And some of these people are probably those who are still unsure about their investments.
We then asked him for any advice that he can give to these people. And his direct answer is to be systematic.
Look, irrespective of the platform we decided to use, the way we want to invest, the most important thing is to be systematic.
To do this, Michel said to invest on a monthly basis dollar cost average. This basically points to diversifying. So don't invest everything in the Singapore stock market. As well as, don't invest everything in the stock market so it has other asset classes.
Those are the two most important things:
- Diversify time by dollar cost averaging
- Diversify assets by investing in fixed income of different maturity dates and different issues, equities of different geographies, equities of different sectors—gold real estates, and whatever else.
That was the entire article on our interview with Michele Ferrario, Co-founder and Chief Executive Officer of StashAway.
He has given us a lot of insightful comments, which we are grateful for. He showed to us how there are actually a lot of great opportunities to invest our money that is within our own means.
So if you are keen to find out more, do visit stashaway.sg and sign up an account if you're interested to try out this robo advisor. And also they do whole seminars regularly. You're going to find out more when you attend those sessions.