Robo-Advisors in Germany: Simple Investing, But Are the Fees Worth It?

When you ask Germans about their favorite investment options, securities likely won't top the list. They're often seen as complicated, expensive, and risky. However, the prospect of solid returns in times of low (or near-zero) interest rates is very tempting. A potential solution—at least regarding complexity—is using a Robo-Advisor.

The Promise of Automated Investing

The robot takes over; fully automated, algorithm-based, affordable. At least, that's what providers explain. Around two dozen now operate in the German market, offering their services to investors. Admittedly, their share of managed client assets is modest. Currently, about two to two and a half billion euros are likely sitting in the portfolios—possibly a bit more. But the industry is holding back on official figures. On the contrary, growth forecasts are welcome. An outlook from Statista, for example, predicts managed assets of 31.066 billion euros by 2023.

Why the Optimism? Low Entry Barriers

There are reasons why development is viewed so positively. A huge plus point in favor of digital asset management is the low entry barrier. The customer sits at home at the computer, fills out a form, indicates their risk tolerance, investment goals, and security knowledge—done. The robot handles the rest. It automatically builds an investment from the information, usually consisting of various ETFs. Basic version: Broadly diversified, spread across various asset classes. Only the investment amount must subsequently be transferred independently by the customer. Minimum investments range from 500 to up to 100,000 euros.

The Cost Reality: Not as Cheap as Advertised

For the all-around service and management, providers naturally charge fees. Usually, it's a percentage of the managed investment amount. Additionally, Robo-Advisors pass on the costs for the ETFs or funds. Some also add a performance-based fee or a flat rate on top. An example: Industry leader Scalable.Capital charges a fixed 0.75 percent of the investment amount, an average of 0.16 percent ETF costs, and 0.05 percent spread costs. Based on a 10,000 euro investment, this results in a monthly fee of 8.00 euros. The Sutor Bank uses 0.70 percent of the asset value as a fee basis and adds an average of 0.20 percent. Plus twelve euros account management fee per year. All in all, this amounts to around 8.50 euros per month with a 10,000 euro deposit. The average of providers is in similar regions.

Conclusion: Paying for Convenience

In conclusion: Robo-Advisors are not quite as cheap as the advertising suggests. However, the user saves a lot of effort—and pays for this service. A look at the USA also shows that prices for digital asset management are low there. In the future, it could become cheaper here as well if competitive pressure increases.

Performance: The Ultimate Measure

The fees are negligible if the bottom-line return is right. Since official results are again in short supply, the real-money test at brokervergleich.de helps, for example. Since May 2015, the makers invested around 87,500 euros in 16 different Robo-Advisors—each in a medium-risk portfolio or a portfolio that, according to the provider, represents the best investment. Monthly, the investment experts published the performance values. The results are issued after deduction of fees and taxes. The Leipzig-based team saves the effort of a 16-fold exemption order for obvious reasons.

"After the turbulent end of 2018, the beginning of 2019 doesn't look bad at all," analyzes André Salzwedel, project manager of the specialist portal, the current figures. With values from +2.2 to +5.2 percent, the Robo-Advisors came out of January 2019. However, this is not quite enough to offset the negative development of the previous year. Between January 1 and December 31, 2018, providers lost an average of 5.9 percent. The best Robo-Advisor was at -3.6 percent in the annual balance, the worst at -8.4 percent. However, investors should be aware that the rest of the market hardly achieved better results. Thus, the two benchmarks that Brokervergleich.de considered also showed deep red numbers of -3.4 percent and -6.4 percent.

"We are aware that the monthly results only represent snapshots. That's why we always put the data in relation to long-term development," says Salzwedel. Anyone looking at the data from the last 24 or 36 months will also be more conciliatory. There, the providers are clearly in the plus. The five Robo-Advisors from the first year of the real-money test achieve performance values of +11.2 to +15.2 percent for the entire period.

Strategy Matters: The Art of Digital Investment

Detailed insights show that there are all conceivable variants—from refraining from any movement to recurring overhaul. What works short-term? What only over the long haul? That remains to be seen. "Finding the right strategy is also the art of a digital investment," concludes André Salzwedel. In this respect, Robo-Advisors differ little from their actively managed counterparts.

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Author: Mario Hess (41) studied media communication at TU Chemnitz and has been working as a specialist editor and media officer in the field of finance and investments at Franke-media.net since 2014. His interest lies specifically in innovative financial products and fintechs.

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