Friday, 25 September 2015

Robo Advisor Anyone?

I was watching an interesting program on BBC4 this week relating to how algorithms impact our everyday lives. Some example included the little square that comes up to identify a face on our cameras, their use in the NHS to identify suitable matching kidney donors and Google‘s pagerank.

It did not touch on investments but I was wondering to what extent they may be useful in this area.

Since the introduction of RDR in the UK, the fees charged by financial advisers has become much more transparent. Those who need advice on such things as pension planning and investments now have to pay an upfront charge to the adviser. Depending on the nature of the advice and complexity, the charges could range typically between £1,000 to £2,000+vat. Many people will be put off and will either attempt to do the job themselves on a DIY basis or may not bother at all.

Could a robo advisor replace the traditional financial adviser at a fraction of the cost and provide reliable solutions?

Robo advisors operate on the principle that markets are efficient, sufficiently so to make it extremely difficult to outperform on a consistent basis. Many of the US-based robo advisers like Wealthfront and Betterment are built around the twin proposition of Modern Portfolio Theory and low cost index investing.

You fill out a detailed online questionnaire - risk tolerance, time horizon etc. The computer algorithm then uses this information to suggest a customised portfolio using low cost index funds and ETFs. Use appropriate tax wrappers, ISA, Pension etc. Rebalance when necessary - hey presto….

Vanguard is a leading robo-advisor in the USA. It launched its personal adviser service earlier this year for those with a minimum of $50,000 to invest and charges 0.30% p.a. for the service.

I see they are now considering introducing a direct to consumer (D2C) platform in the UK which should be an interesting development and will provide an opportunity for them to offer a robo adviser service in the UK. I suspect a few IFAs may be getting a little twitchy at the prospect. But competition is good....right?

They would then compete with the likes of Hargreaves Lansdown, Fidelity, Barclays and TD Direct who between them currently take around two thirds of D2C assets.

I am no expert but it looks like algorithmic investing may provide a valuable tool to the small investor. With a reliable and robust programme, it could sift through thousands of investing permutations to come up with a range of the best options to suit the criteria required by the individual. Of course the end result can only be as good as the programme permits so the way it is set up will be the crucial element.

For example, I could stipulate that I require a portfolio offering the lowest cost with the highest total return from a global market place using a mix of 50% equities and 50% bonds combined with the lowest volatility over a period of 20 years.

It could be a tool to optimise income drawdown for a given lump sum over a given period whilst reducing volatility.

The speed at which the world is changing, I can foresee a time not too far off when the majority will be tapping in a few basic details into their computers for a ready-made lifelong investment solution... copies of ‘Smarter Investing’ will be left on the bookshelf gathering dust - or is this a bit of a fantasy?

All thoughts as ever welcome - leave a comment below.


  1. Interesting developments are afoot! I do think IFAs will continue to dwindle, but they will always be there. Some people need to have that face to face contact, no matter what, and will pay for it.

    There are, of course, other ways where algorithms are being used in the financial world. For example, Algodynamix are a company who have developed algorithms which analyse trading behaviours and can predict a sudden turn in the markets in order to protect one's wealth.

    I think there will always be copies of investing books being sold though, because people love to consume - be that food, drink, or information. And if recent trends are to be believed, the printed book is on the rise again as eBook sales have declined a fair bit this year.


  2. Interesting indeed M.

    Certainly a challenge for the traditional IFA and one of the benefits for the average investor to come out of RDR. Of course, there will always be a need for the face to face relationship and the wealthy will always have more options but maybe the younger more tech savvy investors will be drawn towards a simple low cost proposition from a well respected robo advisor.

    As for ebooks, one of the reasons for the decline in sales would be the adding of 20% vat earlier this year.

    Thanks for your comment M. Must check out this company which can predict the sudden changes in the market.

  3. Interesting stuff, diy.

    Since there's been a lot of news - - about people's jobs being replaced by robots, IFAs are obviously not the exception!

    1. weenie,

      I have been reading more and more recently about this - starting to think its a good job I am retired!

      I have checked out some of the background on the two firms mentioned in the article above and it makes some very interesting reading.

      I would certainly think seriously about trying them out when the become established in the UK as their charges are very comparable to the 0.20 to 0.30% platform charges we have here which are execution only (no advice). The way things are developing, I am thinking I may not have to wait too long.

      As always, thanks for stopping by - enjoy the lovely autumn weather/colours while it lasts.