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.
Some Providers
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.
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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.
Conclusion
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.
