It's a couple of years since my first post on the so-called Robo Advisors and there have been a few developments to the market so I thought I would take another look at some of the current options for the would-be investor.
Robo advisors (RAs) are very widely used in the US via the likes of Betterment and Wealthfront but they are still in their infancy in the UK, but as we all know, new technology is rapidly changing the way we live and work and so we should not be surprised that it will have a significant impact in financial services. Some people are predicting that the traditional roles of doctors, lawyers and accountants could be replaced by artificial intelligence over the coming decade and therefore the role of the financial adviser could easily be added to this list. In the future, increasingly personalized and calibrated apps and personal assistants may be perceived (not just by millennials) as more trustworthy, objective and reliable than in-person advisors.
Around half the population just simply do not have any savings to invest. For the other half however, whilst many people are wanting to save for the future and exploring the options of investing in the stock market, for many complex reasons the majority do not actually do so. Many have a cash ISA but only around 1 in 7 hold a stocks & shares ISA and most of these will have been arranged by a financial advisor. Maybe for some they do not have the confidence or experience to do it themselves, others cannot afford the fees of a traditional financial adviser. For many, they perceive this area as difficult, mysterious, complex or just plain boring so are turned off by the thought of ISAs, investing and pensions.
Robo advice platforms therefore provide an opportunity for the majority of these people to invest for the future in a reasonably cost-effective way without having to put in a lot of time and effort themselves. Whilst many would probably prefer to sit down with a financial adviser, when it comes to paying their upfront fees of £150 per hour, not many can afford to do this.
Obviously, the big attraction for the novice or less confident investor is a solution which does not involve upfront fees and maybe more important, you don't have to research and select your own investments - they do this for you which makes it very simple to make a start in an area which may be very unfamiliar.
RAs aspire to fill the role of a traditional investment advisor. Using technology they can create an optimised, low-fee portfolio based upon your personal circumstances and tolerance to risk. For those with moderate savings, fees are generally much lower than they would be to employ a financial or investment advisor to do this for you face-to-face.
How It Works
In general, when you first register they ask you to fill out an online questionnaire to understand your investment goals and tolerance for risk. Age, experience and time horizon will be factors. They then use the information to build an investment portfolio for you. Very roughly, if you have a lower tolerance for risk they would assign you a larger proportion of bonds, gilts and less volatile investments. If you were young, with a long investment timeline and high tolerance for risk, you may be assigned a higher proportion of equities, perhaps more emerging market or higher ‘risk-return’ options.
In general, RAs then buy low-cost ETFs to invest your money according to your risk profile and charge you a small percentage of the amount invested which is less than you would pay a traditional financial advisor.
In the world of personal finance, the RA could be considered to be good news for those who have felt priced out of traditional investment advice - or who want to tap into new technology to invest. The fees for traditional advice from an IFA or wealth manager would typically work out at 2% or 2.5% on the value of your investment compared to less than 1% with a RA.
The actual services provided by each robo investor differ widely and it's therefore worth exploring their websites to get a feel for the company ethos as well as their approach to investing before you commit any capital. Some provide an app for your phone so that you can monitor your investments on the go. Some have a minimum investment, typically £500 but others allow you to invest as little as £1.
Nutmeg is the most established RA in the UK and is a recognisable name to some Londoners, who have been exposed to the brand through its countless tube adverts. They offer a full range of options including ISA, Pension, Lifetime ISA and General account. They have two options, the lower cost fixed allocation portfolio with charges of 0.45% and the managed portfolio with fees of 0.75%.
MoneyFarm and Scalable Capital are just two of its best known rivals, but there are many more robo-advice challengers entering the market place.
Moneyfarm was established in Italy in 2011 and launched in the UK in 2016. They offer a general investment account, ISA and Pension. They are particularly attractive on costs for those with limited finances as there are no fees on the first £10,000 of investment. The next £90K however is charged at 0.6%. The fees on the underlying funds are slightly higher than most others at 0.30%.
Scalable Capital launched in 2016 and has its operation in both the UK and Germany. they have a fixed fee of 0.75% plus an average of 0.25% cost of ETFs. They currently only offer an ISA but plan to introduce SIPPs in the near future. One drawback is their minimum sum starts at £10,000.
evestor are the new kids on the block set up earlier this year by Moneysupermarket founder Duncan Cameron and Anthony Morrow, most recently of Paradigm Group. Their mission statement is to make financial advice available to everyone regardless of their circumstances and to lower the costs of this advice.
The costs are competitive with an all-in offering of just under 0.5%. In addition they offer the opportunity to discuss any recommendation with their financial advisor at no extra cost.
Moneybox is another new start up aimed at the younger crowd and passive investor and markets itself as the app that “invests your spare change.” It works by linking up a bank account and rounding up your purchases and investing it in a portfolio. It has three portfolios to chose from, with tracker funds through BlackRock, Vanguard and Henderson.
The platform has no minimum amount but charges a £1 a month subscription fee, a yearly 0.45 per cent platform fee and fees charged by the fund providers, which average ~ 0.23%.
IG Group now offer their customers a range of 5 ready-made' Smart Portfolios' covering ISA, SIPP or General. Charges are tiered according to the amount invested - up to £50K is 0.65% and then to £250K is 0.35% plus average ETF fees of 0.22%. Clients with other types of account with IG such as CFD or spread bet may qualify for a small reduction.
Is This Advice?
Robo advisor is a misnomer because most of these firms are not authorised to provide financial advice in the traditional way. If a company in the UK gives financial advice they have to be (a) authorized to give investment advice by the Financial Conduct Authority and (b) have to know your financial circumstances intimately. That's why the term robo advisor is misleading.
If you take fully regulated advice or simplified advice and it turns out it was bad advice for you, you can make a claim against the adviser and are eligible for compensation from the Financial Services Compensation Scheme in the event the adviser is unable to pay.
The qualified 'guidance' offered by RAs doesn't offer this provision - you take responsibility for the investment decision you make and if it turns out to be a poor one (for example putting all your savings into one high risk investments that then goes under) you have to bear that loss yourself.
There is clearly a large gap in the market for the many people who cannot afford a financial adviser and who do not wish to or cannot diy.
RAs are certainly cheaper than the traditional wealth manager or financial adviser and will appeal to those who lack confidence in a diy approach or just can't be bothered to learn. However the diy investor who is prepared to do some research and use a combination of low cost index funds such as Vanguard Lifestrategy together with a low cost platform will almost certainly get a better return at every level of risk.
Based on the limited time investigating some of these options, my general impression is that RA has much to offer. My reservations would be whether the RA initial online questions can accurately establish the investors true risk level and secondly I guess it will not be too long before the big banks want a piece of this market and as the customer bears all the risk, there is the possibility of these products being mis-sold...time will tell.
I would be interested to hear if anyone has any experience of using a RA...feel free to leave a comment below.