This is a guest post by Ben Shearon, an English teacher living in Sendai, Japan. Ben runs the website RetireJapan to share information and help others take control of their financial future.

Enjoy, Andrew.

 

Arigato Mr. Roboto – Robo-advisors in Japan

 

Automation is popping up everywhere.

The sushi restaurant next to my house allows customers to order from their seat using a touch panel. Soon after ordering the freshly made sushi (the rice is shaped by a machine) arrives on a little train. Thanks to automation, a handful of staff can serve cheap sushi to hundreds of customers.

This is just a glimpse of what is coming. The BBC has a website that tells you how likely your job is to be automated in the future. This terrifying video shows some of the potential outcomes.

As part of this trend, financial advice is being revolutionised by the rise of the robo-advisor.

 

What is a Robo-Advisor?

Robo-advisors are financial services that offer portfolio management via computer software instead of human advisors. This allows them to offer lower fees and take on clients with much smaller portfolios than traditional financial advisors.

While in the past you might have needed 6- (or 7!) figures to get someone to manage your money, with a robo-advisors you can get them to do it with much less.

 

Benefits

The main benefit of using a robo-advisor is getting access to professional portfolio design and rebalancing.

The fees tend to be relatively low, and portfolios are designed to match your risk profile and be diversified across different assets.

Another benefit is low transaction costs. With a robo-advisor you pay an annual fee, but individual transactions are often free. You can invest small amounts every month, something that wouldn’t be possible if you were paying a fixed transaction fee such as when buying ETFs or individual stocks.

Many of the people that come to the RetireJapan site have very little experience with investing and are perhaps not interested enough to read up on the subject, but are hoping to get their finances in order and invest for the future.

Being able to recommend a decent (not optimal, but good enough), easy-to-understand option would be wonderful. Unfortunately, there are some drawbacks.

 

Drawbacks

I think there are two main drawbacks. The first is that the fees are higher than they would be if you made your own portfolio using low-cost ETFs.

The second problem is that the algorithm can’t save you from your own bad behaviour. Robo-advisors suit people who don’t know enough to manage their own portfolio, or who don’t have the time or desire to. Unfortunately this lack of knowledge may lead them to panic during market volatility and pull their money out at the wrong time.

The fact that there are no humans you can talk to during a crisis makes this danger worse.

 

Robos in Japan

Japan has seen at least three robo-advisors open in the last year or so. More are on the way, including a joint venture between Vanguard and large Japanese banks.

Services currently operating are 8 Now!, THEO, and WealthNavi (invitation only at the moment). They offer similar services but have slightly different minimal investments and fees, as shown in the table below.

	Minimum investment	Annual fee
8 Now!	$88	0.88%
THEO	100,000 yen	1%
WealthNavi	1m yen	1%

 

Now, based solely on that table, you might think that 8 Now is clearly the superior choice. Not only does it allow you to open an account with much less money, the annual fee is also lower. Given that the portfolios each service constructs are similar, why not go with the cheapest option?

Well, there are a couple of caveats. The THEO website is clearer and easier to navigate. Their application process and account management (transferring money to and from the account) are simpler and involved less back and forth in my case. And most importantly, they can provide you with a tokutei account. Tokutei accounts provide you with an annual summary that vastly simplifies your tax declaration. They are recommended for most investors (but please consult the tax office or your accountant). 8 Now! does not currently offer this.

To open a robo-advisor account you need to be a resident of Japan with a Japanese bank account and a Personal Identification Number (My Number). You will also need to complete the application and communicate with the company in Japanese. If your Japanese is not up to scratch you should be able to get by with someone to help you with the language as the application is online.

 

US Considerations

Unfortunately, US citizens and green card holders cannot use these services. This is because of the US government’s costly and punitive registration and reporting requirements.

There is another possible US issue. The IRS currently lays claim to inheritance taxes on US-listed shares and other property worth over $60,000, regardless of the nationality and country of residence of the owner. For many people, this means they should avoid US-listed shares and ETFs. The three Japanese robo-advisors described in this post use US-listed ETFs to construct their portfolios.

For residents of Japan, though, this may not be as dangerous as it first seems. I asked 8 Now! And THEO how they viewed the issue.

8 Now! (translated from Japanese): “Our company is incorporated in Japan and our accounts are administered under Japanese tax law, regardless of the country that issues them. Upon the death of an account holder all assets will be transferred to their inheritors.”

THEO (translated from Japanese): “We believe that our clients are not subject to US inheritance taxes. This is because all assets are held by THEO in a company account, not in individual investors’ accounts. On the death of a client, we would liquidate their account and transfer all proceeds to the inheritors.”

 

Other Options

For UK investors, a service called Nutmeg may be an option. They are currently willing to take non-residents (a rare occurrence in the UK) although there may be negative tax and residence implications. Holding a UK investment account would subject overseas investors to UK taxes on their holdings, and possibly result in them being deemed resident for tax purposes.

Either way you will have to declare any worldwide capital gains or dividends to the Japanese tax authorities if you are a long-term resident.

 

The Bigger Picture

There is some speculation about the future of robo-advisors. Michael Kitces wrote a detailed blog post about this topic, concluding that the technology may well be adopted across the financial sector while the companies that developed it are absorbed into larger entities.

Whether or not robo-advisors survive, or whether as in Chess, humans working alongside machines end up victorious, they represent interesting options for investors and those advising them.

For more information about investing for residents of Japan, please drop by RetireJapan. We don’t have all the answers, but together we can figure them out.