Robo-Advisors are more popular than ever, no more so than in the UK, but what are they are where did they come from?
In 2008, two new fintech start-ups launched a trading revolution. Wealthfront and Betterment launched their robo advisor products that catered to a new, digital-native audience while also tackling issues that previously locked so many people out of trading and investing. These two pioneers offered lower fee services for fee conscious clients who preferred to see their investments in front of them on-demand, rather than in a quarterly summary prepared by a wealth manager.
It wasn’t until 2012 that robo-advisors fully arrived in the UK, and by then, many of the niche’s early kinks both in product development and messaging were already worked out. Nutmeg became the UK’s answer to Betterment, and it was the first of many start-ups to offer UK residents the chance to invest in the financial markets (outside of the traditional stocks and shares ISA).
Today, as we show in our guide to UK Robo Advisors, UK residents have access to a long list of robo advisors, including programs offered by industry disruptors and challenger banks as well as long-standing industry giants whose efforts quickly outpaced the start-up scene including Wealthify, Moneybox and Moneyfarm. Even still, you might wonder; what is a robo advisor, and who’s really suited to their investment product?
Our complete guide to UK robo advisors explains what makes robo advisors different, whether you can trust them, and how they fit into a strong retirement strategy.
Top 5 UK Robo-Advisors
What is a Robo Advisor?
A robo advisor is an online investment platform that uses a short survey to determine your investment strategy in order to match you to an appropriate portfolio, and a proprietary software program to manage your investment. It’s a hands-off approach to investing your money that allows both new and familiar investors to check in on their portfolio every one in a while without the need to learn the ins and outs of trading on the stock market.
It’s best to think of a robo advisor as an all-in-one investing solution that requires very little from the client beyond your bank details and a few questions to establish your risk profile in order to make investment decisions on your behalf. You won’t be making trades, and you probably won’t know whose stocks, shares, and bonds you invested in. Instead, you sit back and let the computer make the decisions on your behalf. What could be easier?
What Products Do Robo Advisors UK Offer?
Robo advisors offer both general investment or a trading account as well as a number of the popular retirement and tax-deferment options used across the UK. The typical robo advisor may provide some if not all of the following products:
- General Investment Accounts
- Investment ISAs
The same robo advisor platform may also offer all the tax benefits that can be accessed within Junior ISAs or Lifetime ISAs. However, these accounts won’t be privy to the robo advisor product as they are not investment products.
How Does a Robo Advisor Work?
Robo advisors use an algorithm to choose your investment portfolio based on things like:
- Your risk profile
- Your current investment goals
- Your projected investment term
Because you won’t do any trading on your own, and you won’t have a human advisor doing any trading on your behalf, your portfolio usually comes in the form of different funds rather than individual stocks and bonds.
Most platforms use a theory called the Modern Portfolio Theory (MPT), a Nobel Prize winning economic theory, to create portfolios that the survey then assigns to each customer based on the three data points above (risk profile, financial goals, term). MPT argues that you can create an “efficient frontier” of portfolios optimised to generate the best available growth for each level of investment risk. Basically, it says that you shouldn’t consider risk and return individually but instead evaluate them against the whole portfolio for optimal performance. The theory operates on the presumption that all investors are risk-averse by nature and would prefer a portfolio that offers low risk with a reasonable return, and investors only want more risk if the growth matches it.
What does it mean in terms of a robo advisor’s portfolio offering? It means a significant focus on an instrument known as an index-based exchange-traded fund (or index-based ETF). However some robo advisors will also use mutual funds as part of their portfolio construction.
What Are Index-Based ETFs?
Indexed-based ETFs are ETFs that track the performance of an index (like the FTSE 100). Indexes track a targeted group of companies that reflect the growth of the overall market. Thus, an index-based ETF attempts to provide investors with a return that reflects the subset of the market they’re tracking.
Why are index-based ETFs such a popular addition to a portfolio among robo advisors? First, they’re low cost, which benefits both the robo advisor platform and the consumer. Second, there’s a tonne of investing research underpinning their use within a portfolio; they offer a favourable return compared to tools like fully managed mutual funds both in the short-term and long-term. In fact, research from two key players in the U.S. robo-investor market found that index-based ETFs outperform mutual funds 80-90% of the time. As a result, robo advisors offer both a low-cost and efficient form of investment that also happens to offer a long list of other benefits.
What About Mutual Funds?
Mutual funds use active fund management in an attempt to produce better returns and beat the stock market. As a result, they aren’t found among robo-investors which demand a more passive role to function. Some providers who offer robo advisor services may offer mutual funds as a separate product. Because mutual funds demand active management from a human advisor, the management fee is higher.
As a result, they don’t cater to the crowd who would prefer to accept computer-driven investment service in favour of a lower management fee. The difference can be significant: you could spend 1-3% on management fees on a mutual fund but a robo advisor could charge you as little as 0.25%.
Who Do Robo Advisors Help?
In the past, access to trading was largely limited to those who either had the knowledge to go it alone or those who could afford to pay a financial advisor service to work on their behalf. It was also limited to people whose initial investment amount was large enough to meet a high quota — not the everyday saver or new investors getting started with their portfolio.
Robo Advice turns existing financial services products on their head by combining a low management fee with a low barrier to entry.
How Much Does A Robo Advisor Cost?
Whilst the cost of a UK robo adviser is significantly less than what you would expect to pay a traditional financial adviser, there is a management fee involved which can vary wildly from one investment service to another.
Typically there are two major components that you need to worry about, the portfolio management fees which is usually a percentage of your total assets and typically costs anywhere between 0.25% to 0.5% and the Fund Fees which can be anywhere between 0.05% and 0.65%.
Some robo advisers will use a sliding scale fee structure based on your annual investment amount so it is worth checking which bracket you would fall into before attempting to calculate your costs. This sliding scale can also make it worth changing from one robo adviser to another once you have grown your money so check there are no withdrawal fees associated with the robo adviser you choose.
Which is the Cheapest Robo Advisor in the UK?
Whilst low fees shouldn’t be your only consideration when choosing the best robo advisor for you, it is a factor and we have therefore conducted a price comparison of the major UK robo advisors on the market today. There are many variables to consider when it comes to how much money it will cost, such as the minimum investment amount offered by the robo advisor, which trading account is best suited to your needs, and the services that each UK robo advisor offers.
Many UK robo advisors have hidden fees, such as deposit and withdrawal fees, set-up fees, trading fees, transaction fees, and exit fees. However, Nutmeg scrapped all these extra charges and at just 0.25% for a fixed allocation portfolio beyond £100k and 0.19% fund fees we felt that these low fees offered exceptional value for the level of investment service Nutmeg provides.
Should You Use a Robo Advisor?
A common misconception is that robo advice generally isn’t for clients interested in investing in wealth accounts or high-net worth clients. Early versions of the consumer-facing product saw that not only were the premiums not optimised for high-value accounts, but there was no real oversight from humans, which some consider essential.
What’s more, robo-advice tended to be inflexible; you couldn’t maximise your investment nor will you have any sort of detailed or personalised financial advice. This image and trend is changing, however, and while some robo advisors do fit the above description and use it as their value proposition, an increasing number of platforms are integrating new (traditional) services to supplement their computers’ activities. In other words, you’re not only more likely to now see clients with £100,000+ using robo advisors for at least part of their portfolio, but financial managers are also enlisting them on their clients’ behalf.
Is There Anyone Who Won’t Benefit From a Robo Advisor?
At present, robo advisors won’t directly benefit those who aren’t transferring money into their accounts regularly. Although they are often one of the cheapest methods for getting a foothold in the markets, the management fee will likely eat up much of the return in very small accounts where the investor only adds £10 at a time.
These customers can use the product, but they might be better suited with cash savings options that feature no-to-low fees until they build up a cash nest egg for investment. Investing with a robo advisor is a long term proposition and therefore customers looking for short term gains on their money would be better off placing their money in a high interest, easy access, cash savings account.
Do Robo Advisors Beat the Market?
The simple answer to this is that it would rarely happen for even the best robo advisors to beat the market, however, even matching the market can lead to strong returns and beating the market isn’t always realistic. The index fund investing strategy that is followed by most robo advisors will often match market performance, but more importantly, offer investors a less volatile portfolio during economic upheaval. A financial advisor will also struggle to beat the market, and in some instances a robo advisor has actually out performed its human counterpart at less cost.
Are Robo Advisors Suitable for Wealth Management?
Many of the best robo advisors both in the UK and in the global industry generally tout themselves as being perfect for small investors. Their low management fee combined with low investment thresholds do cater to that group.
But are robo advisors also suitable for investors with £200,000 or more to transfer into an account or is traditional wealth management still a better option? While some robo advisors exist to cater to small investors, there are products available for investors with accounts worth six-figures or more. What’s more, industry experts say that robo advice products are becoming more popular across wealth levels, with many high-net worth individuals choosing to split their money between wealth managers and computer advisors. The practice is more popular among Asian and Latin American investors than North American and Europeans, who are slightly more cautious.
The sector’s willingness to expand its core market is important not only for gaining today’s wealth customers but also because as the global Baby Boomer generation begins to pass away in greater numbers, younger generations will inherit £1tn in wealth.
It’s important for robo advisors to be ready for a generation of investors who are already comfortable with using digital services rather than traditional wealth managers, but who don’t yet have a high net-worth.
Can You Trust a Robo Advisor?
“Can we trust the robots?” It’s a good question. After all, they are asking for your money, and investing cash automatically carries some investment risk. While the robot’s won’t make emotional decisions, you are at the mercy of an algorithm you can’t see (nor would you necessarily understand). The answer is “yes, you can trust the robots.”
Why? In part because you can trust the theory powering the average robo advisor. Many are modelled based on Nobel Prize-winning economic theory, which makes them both smart and cutting-edge. The use of an algorithm to make an investment strategy also means that there won’t be any sort of emotional decision making. Your portfolio won’t suffer because someone is having a bad day or because they hit the wrong button.
Further evidence of the value of robo advice comes from the fact that they are increasingly used as a “white label” practice. Traditional advisors are increasingly using them for client work to streamline the asset selection process and free up their time for more valuable work. So, these products aren’t just for those locked out of the market: they have value for industry professionals, too.
Finally, any trustworthy robo advisor will have authorisation from the Financial Conduct Authority (FCA) and participate in the Financial Services Compensation Scheme (FSCS). Thus, if anything goes awry, these programs mean your investments and money are protected up to £50,000 (Financial Conduct Authority) and £85 000 (FSCS).
Look for approval from both bodies before you provide your details to any start-up.
Can Robo Advisors Make You Money?
Whilst robo advisors have caused much skepticism among professionals as to their effectiveness when compared to traditional investment methods, they rely heavily on complex algorithms which are based on sophisticated economic research and therefore represent the best economic models of investing.
Competition within the robo advice market has led to low fees, which in turn means an increase in investor returns. Of course there are variables and any fees can erode away at small investment amounts, however, they can effectively make you money in line with your risk appetite.
Does the Robo Advisor Hold onto My Money?
The answer is probably not, particularly among start-ups. Many of the independent robo advisors aren’t investment banks. They offer software and serve solely as a platform. Your money will likely be held by a custodial broker. For example, Wealthsimple is a leading robo advisor in the UK. It partners with SEI Investments (Europe) Ltd., which is Wealthsimple’s custodial broker and both executes trades and holds customer money on behalf of Wealthsimple.
It’s worth doing research on the custodial broker or partner bank before opening an account with the robo advisor and investigating where your money will be held so you can ensure the safety of your money should the robo advisor go bust.
What are the Benefits of Choosing a Robo Advisor?
Robo advice comes with a long list of available benefits, which is no surprise given their stratospheric success.
Cost Effective with Good Returns
The biggest benefit offered is their premise: they offer quality investment tools at low cost, which is a proposition that’s difficult to execute. As mentioned above, robo advisors accomplish this by using a MPT theory and relying heavily on index-based ETFs, which provide low-cost performance. Although this benefit often speaks to new investors, it’s a helpful tool for those with mature wealth who want to further diversify their portfolios.
A robo advisor is a low-maintenance place to park a portion of your money and watch it grow and enjoy the cost savings compared to typical asset management fees.
Easy to Use
What attracts everyday savers who don’t have a wealth of investing experience is how easy they are to use. All you have to do is open an account which is usually very simple. Though, you can expect to provide a list of essential details to ensure compliance with HMRC and international law. From there, you can link your bank account and set up a direct debit to invest as much money as often as you like. Additionally, robo-investors allow you to choose a portfolio based on your financial goals and your preferred investment risk tolerance, which means there’s no research involved.
Quality providers also provide enough easy-to-digest information on their websites to educate all their customers on what’s happening behind the scenes. Their resources can be a good starting point for further investments and diversification as your cash grows.
Once you’re set up, you can largely forget about it. Though, it is good to check in on your investment and update your risk tolerance and goal preference as required. robo advisors even automate the rebalancing process, which ensures that your investments and mix remain constant even as markets change.
Low-to-No Minimum Balance
Another benefit is the ability to keep a low minimum balance both as you start out and if you need to withdraw your cash. You won’t lose access to your account even if it sits empty. Not all accounts offer this feature. Start-ups are more likely to allow this compared to legacy banks.
Are There Any Disadvantages?
While the list of benefits is long and attractive, there are some drawbacks associated with robo advisors that are worth considering. The biggest of these is the lack of personalisation (at least so far). These providers shuttle everyone into one of a handful of portfolios based on some general questions. While this approach has some merit (and there’s sound science behind it), it’s important to remember that there’s more to your financial goals than a basic risk profile.
Some robo advisors are increasingly offering greater personalisation to address this. You can also switch your risk levels and change your investment goals among some providers. A second disadvantage is that you won’t get any financial advice when there’s a big market swing. For example, when the potential of a new pandemic sent the markets into free fall in early 2020, investors were on the phone with their money managers wondering what to do next.
If your plan is strictly run by a computer, you won’t have anyone to tell you not to sell up — or what to do next. You’ll need to make the decision for yourself and hope it’s the right one. Finally, it’s important to remember that while some robo advisors offer lower fees than financial advisors, not all do.
There are many products and advisors out there. Avoid following the assumption that a robo advisor will save you money in every instance because that’s not true.
The bottom line is there are many things robo advisors have the potential to do better or cheaper than a human.
The key is to remember that they have the potential: not every product or platform will live up to it.
How Much Will You Make Compared to a DIY Approach?
There’s no way to say just how much you’ll earn via a robo advisor compared to a mutual fund or buying stocks and bonds individually. Every part of the process is unique, and of course, the market changes in ways that are not always predictable.
It’s worth noting that you won’t necessarily earn as great a return with a robo advisor compared to a DIY approach. The portfolio building process combined with the prevalent use of ETFs means that your portfolio will match risk with reward. When might you earn more by choosing to build your own portfolio? You’re likely to see better returns when:
- You already have investment experience
- You have the time to manage your own investments
- You have time to seek out and manage low fee platforms
But if you’re a new investor, have little time to dedicate, or just want to watch you money (hopefully) grow steadily over time at a rate that should beat a savings account, then you are more likely to prevail with a robo advisor.
Which is the Best Robo Advisor?
The best robo advisors are increasingly hard to define because there are frankly so many options to choose from. As it stands, there is no clear front-runner among the UK products.
There are those with significant marketing budgets and deep pockets, but that doesn’t necessarily correlate to being the ‘best.’ What’s more, there’s a fair amount of churn in the sector: both large and small robo advisors have been known to sell up, close down, or pivot their services. For example, UBS has deep pockets, but it sold its robo product in 2018, only a year after launch, to a U.S. firm. Tiller Investments offered a discount to any UBS customers who transferred their accounts before closing its own robo advisor product in 2019.
What’s most important is to do your research and determine what platform caters best to your needs and investment goals. Your top-tier of products may differ significantly from others’, and that’s not only okay, but it’s to be expected. The most important thing is to find a product that enables you to grow your wealth as it currently stands. In addition to finding the best robo advisors to meet your needs, it’s also important to seek out a provider that’s generally reputable. In other words, they should not only have FCA and FSCS backing, but a history of good governance, experience in economics and finance, and a strong showing of support from their own investors.
Some of the more prominent robo advisors are listed below.
Moneyfarm launched in Italy in 2012, and it’s one of the largest and best funded robo advisors operating in the EU and UK.
Moneyfarm now operates out of the UK, having received FCA approval in 2015, and it officially opened for business in 2016. In that time, the Moneyfarm team received over £60 million in investments from both UK private equity firms and giants like Allianz Global Investors.
Moneyfarm has 40,000 customers across Europe and regularly receives awards both in the UK and further afield. Moneyfarm was YourMoney.co.uk’s Best Online Direct to Consumer Investment Platform in 2018.
Like other robo advisors, Moneyfarm sends funds to a custodian bank. It also has coverage from the Financial Services Compensation Scheme (FSCS), which means you’re insured up to £85,000. All the leaders and advisors at Moneyfarm have extensive experience either in finance or in venture capital.
Of special note is one of the company’s advisors, Michael Spence. He received the 2001 Memorial Prize in Economic Sciences for his work with Joseph E. Stiglitz and George Akerlof on market development and information flow dynamics.
Today Moneyfarm has seven managed portfolios for customers to choose from according to their level of risk with exposure to ETFs, although with even the riskiest portfolio at Moneyfarm being largely focused on UK and US stocks in their asset allocation, it is not an overly risky strategy.
Moneyfarm also operates a tiered fee system whereby accounts under £10 000 will incur Moneyfarm management fees of 0.75% per annum. These fees can be reduced all the way to 0.35% for accounts worth over £100 000.
Moneyfarm has positioned themselves in the market as being ideal for beginners with a simple pricing structure and heavily diversified portfolios for investors who would usually struggle to access wealth managers or indeed investment advice. They also provide a top performing stocks and shares ISA and their website displays a clear four year track record of the performance of their portfolios.
The minimum investment at Moneyfarm is currently £500 and you will need a monthly direct debit of £100 or more.
Wealthsimple is a North American start-up that now caters to UK customers and holds a London office. The company boasts 175,000 customers across the UK, U.S. and Canada and has assets under investment management of £3 billion.
In the UK, Wealthsimple benefits from coverage from the FSCS and is regulated by the FCA.
Wealthsimple uses a custodial broker, SEI Investments (Europe) Ltd., to execute trades and hold UK assets. SEI looks after $468 billion in client assets and benefits from both FCA regulation and FSCS coverage.
Wealthsimple is one of the larger robo-investors offering an investment service in the UK, and it’s set to grow. It’s received over $200m in investments from investment heavy-weights. The board is made up of people with huge experience in finance, including Bertrand Badré, the former CFO of World Bank and Joseph Engelhart, the CIO of Allianz X.
The minimum investment at Wealthsimple is just £1, which they claim is a way of making investing accessible to everyone.
Nutmeg is the UK’s largest and best known robo advisor and a pioneer in the UK market.
When it opened its doors in 2012, it was the first online discretionary investment management company in the UK and it immediately won Finovate Europe’s Best of Show Award in 2012 and even an endorsement from the UK government.
As of 2020, the company has over £2 billion in assets under investment management.
Nutmeg concentrates its efforts in exchange traded funds and investors are free to choose between Nutmeg’s Fully Managed plan or the Fixed Allocation plan. Whilst the Fixed Allocation plan relies solely on the technology used by robo advisors, the Fully Managed plan at Nutmeg has the security of the in-house investment team who will monitor and adjust the portfolio according to changes in the market.
In terms of performance this Fully Managed account has returned 43.7% over the past 7 years on a risk rating of 5/10.
Nutmeg requires a minimum investment of £500 so is more suited to serious investors.
Nutmeg has an innovative interface from which to track your investments and it takes moments to open an account
Fidelity is a stalwart in financial planning, and the new Fidelity Go product provides current and new customers with access to Fidelity’s own robo advisor.
The premise is to provide a robo advisor to automate investing with low fees, but Fidelity also assigns a team to monitor the markets and adjust strategies.
The minimum investment amount at Fidelity is £1,000 which is higher than a lot of the robo advisors on the market.
Exo Investing offers a slightly different approach to the traditional robo advisor and instead markets itself as an ‘AI private banker’ for everyone.
By using AI, Exo can offer more personalised services than a robo-investor using an algorithm. It asks about your experience, risk appetite, preferences, expectations, time horizon and more before developing a more personalised portfolio for you. It also allows you to rely solely on the AI’s choice or contribute to the decision making.
The company uses Nucoro technology and partners with asset management firm ETS. ETS is a partner in the firm as well as with financial legends Arianne and Benjamin de Rothschild, whose work is dedicated to improving and leveraging technology in the financial sector.
The minimum investment amount at EXO Investing is £5,000 for each of its products.
Scalable Capital is one of the growing number of German robos, but this platform doesn’t limit its advisors solely to residents of Germany.
It’s now one of the top UK advisors, and investment in its product continues to grow.
Unlike Nutmeg, Scalable Capital caters to a crowd of confident investors: you need a £10,000 minimum investment to get started with a general account (not required for stocks and shares ISAs). However, it’s won the company 2 billion Euro in assets under management, meaning it doubled its funds in only 18 months. It now rivals Nutmeg in size: Nutmeg claims its £1.9 billion is equal to 2.2 billion at current exchange rates.
Another sign that Scalable is serious comes from its partner firms: it works with BlackRock (yes, the BlackRock with $5.1 trillion in assets) as well as ING-DiBa, a German firm.
It also opened its doors as other robo advisors in the UK began to shutter, which suggests that its commitment to the robo advisor service is serious.
The Vanguard Group
For those already familiar with or customers of The Vanguard Group, there is the brand new Vanguard robo advisor.
The product removes any personal advisor services, but it only offers Vanguard funds, which makes it very inexpensive but also very limited. Because the product is new, there’s not much to say about it yet. However, it does come with the consolation that Vanguard is a well-established global wealth management firm.
Evestor (by OpenMoney) is a smaller robo advisor that caters to the new investor.
Deposits start at £1, but there’s no general investment account available.
Its parent company, OpenMoney, is a traditional investment firm founded in 2017 offering personalised financial advice and fully managed portfolios for an audience who are traditionally locked out of financial advice.
The team behind OpenMoney are inherently budget-conscious: co-founder Duncan is also one of the personalities behind Money Supermarket.
One of the big differences between OpenMoney and other smaller robo advisors is that it sought approval from the FCA to also provide financial advice in addition to providing robo advisor services.
The company doesn’t share any financial info about backers or assets under management.
IG Smart Portfolios
IG offers its Smart Portfolio as the firm’s robo advisor offering.
IG’s name recognition is already strong, which makes it a key player in the robo-race. Like Scalable, IG also partnered with BlackRock to create its Smart Portfolio system, which inspires real confidence in terms of the advisor’s longevity.
For those who haven’t used IG, the firm was founded in 1974 and is currently listed on the FTSE250. It boasts a market capitalisation of £1.98 billion and 1,700 staff across the world.
The “big sell” offered by IG is that you get access to BlackRocks’ asset allocation models, including BlackRock’s iShares ETFs. There’s no need to wonder what algorithm is behind your portfolio’s investment decisions: there’s a trillion reasons to have confidence in the product.
Which Robo Investor Has The Best Returns?
Knowing the historical performance of the robo advisor you are considering is of course important before making your choice, however, historical returns cannot guarantee future performance so we would urge investors to consider other factors such as minimum investment, management fees and the products on offer before making their selection.
The other thing to consider is that investing is a long game and generally investors are encouraged to leave their investments for a minimum of five years in order to see any real gains on the original amount of money. This is due to the ebbs and flows of the stock market, with some years proving particularly volatile.
Because many of the robo advisors have entered the market within the last five years, it makes it very difficult to quantify which of the current offerings is performing best, however, our research has shown that Wealthify are one of the top performing robo advisors on the market with a 25.5% return on their adventurous plan between March 2016 and March 2019. This is a great result over just three years. Of course when measuring returns it is important to factor in fees as high fees can seriously erode any potential gains.
Are All Robo Advisors the Same?
No, each robo advisor operates according to its own proprietary software as well as its own platform rules. Robo advisors may assess different fees, offer unique funds, and may provide a different array of services.
Is a Robo Advisor Worth It?
The market for robo advisors has grown substantially over the course of recent years, largely as they provide access to the financial markets to new investors and people with a small investment pot. They also offer a low cost alternative to traditional financial advice and adherence to the latest research for investment performance means they are often a high performing option. That being said, robo advisors are not in any way personalised, and therefore cannot take your unique circumstances into consideration when it comes to investing. However, if you are after a simple, time and cost efficient means to investing then they are an excellent choice.
How to Choose a Robo Advisor
Because robo advisors largely offer the same value propositions and use the same technology, choosing between them comes down to the smaller details, like pricing and investment service offering. Some of the things to consider include:
- Management fees
- Investment options
- Access to human advisors
- Types of accounts
- Minimum lump sum investment
The same rule applies to robo advisors as it does to any other financial account: the management fees don’t tell the whole story. It’s helpful to sit down and determine what’s most important to you. Are you looking for a place to dip your toe into the water? Or are you looking for somewhere to start growing your wealth in earnest? Robo advisors can offer both, but you’ll need to assess each platform’s offerings against your own goals to understand whether they’ll work for you.
What Happens If a Robo Advisor Goes Out of Business?
A robo advisor effectively acts as an intermediary between you, the customer, and the custodian which is where your money is actually held. This means that in the event that your robo advisor goes bust, your money will still be safely held with the custodian and will remain untouched. It is then up to the customer as to what you would like to do with your money. As well as this, most robo advisors will be part of the Financial Services Compensation Scheme, protecting your assets to the value of £85,000 should your robo advisor go out of business.
Common Robo Advisor Terms Defined
What is an Investment Portfolio?
An investment portfolio is a group of financial investments, predominantly made up of stocks and shares, bonds, commodities, cash, funds and ETFs. Historically a portfolio would be built by a financial advisor, however, with a robo advisor an algorithm is used to provide an asset allocation of diversified investments grouped together within a portfolio that meet your goals and your risk profile.
When choosing your Robo Advisor it is important to ensure that you are happy with the portfolio choices. A well diversified portfolio can help mitigate your exposure to risk with a vast range of asset classes. Whilst the exact construction of each portfolio will vary, you should look beyond simple portfolio construction and understand the type of investments within.
What Are Ready Made Investment Portfolios?
Ready-made investment portfolios are a staple of the robo advisor universe, and they’re increasingly used by traditional financial planners as well. A ready-made portfolio is the equivalent of an ‘off-the-rack’ suit. You try one on, and if it fits and you like it, then you walk away with it that day. You don’t need to decide the details of the collar or the cuffs. It’s ready to go. Another person can come in and buy the exact same thing, if they like it. In most cases, the portfolios are designed by the investment team behind the company. They do the research to ensure the portfolios minimize risk and maximize return in each instance. Most ready-made portfolios contain a diverse combination of investments contained in a single fund.
You might also find that some providers offer ‘themed’ portfolios. For example, ‘green’ or ‘sustainable’ portfolios are a trend. If you prioritise investing only in companies that are environmentally-friendly, then choosing one of these portfolios means you won’t be a shareholder in a company that doesn’t align with your beliefs. While there’s usually a team of people behind the curation and maintenance of each portfolio, they don’t do the trading.
What is Automated Trading?
Automated trading is a computer program that places trades based on a clear set of rules built into the code. The trade can then occur at a frequency that’s available when a human is behind the keyboard. The computer automatically monitors stock prices and buys and sells automatically when the rules or conditions appear. It means that all trades take place at the optimal price, and the order is accurate and occurs instantly, and it costs less. All of these produce serious value for the investor because a simple error can cost them serious money. Automated trading also includes high-frequency trading, which occurs when the computer creates a huge number of orders in a few seconds. However, automated trading differs from algorithmic trading.
How to Deal with Taxes and Robo Advisors?
A robo advisor is a platform that works with a broker. It doesn’t offer financial services nor does it offer tax advice. This is a big difference from fully-managed financial services. As a result, you need to take care of the tax implications of your investments on your own in order to protect your money. Fortunately, it’s not difficult to do. Because robo advisors in the UK offer both taxable and tax-wrapper products, you’ll need to open your accounts wisely. If you haven’t already, it’s a good idea to start with a stocks and shares ISA or SIPP account, which both offer tax benefits. These accounts allow you to earn dividends and gains tax-free up to your allowance.
Remember that you don’t need to declare your stocks and shares ISA interest, income, or capital gains on your taxes. For those using a general investment account, it’s helpful to look for a robo-investor who mitigates your tax liabilities.
UK taxpayers have a £12,000 capital gains tax allowance per year, but the rate on all earnings above £12,000 is 20%. You may also need to pay income or dividend tax on cash distributions that go beyond your allowance.
Ideally, you will choose a robo advisor that produces tax statements on your behalf to provide to your accountant. For example, Wealthsimple automatically provides tax statements for investors who made gains in excess of £500. Those who earned less must request them.
Guide to UK Robo Advisors Conclusion
Robo advisors initially made their mark as a low-cost, low-barrier product that allowed a new generation to invest in the financial markets. However, as these products have grown both in scale and scope, they now appeal to more than the new saver. Even those who can and do afford wealth management consultants are increasingly using robo advisors to manage some of their portfolio.
The benefit of using a robo advisor is that these products typically use tried-and-tested theories to create portfolios. Each portfolio is optimised for long-term growth and a suitable amount of risk. What’s more, good products will have all the appropriate backing from the FCA and FSCS, which means your initial investment is protected should the provider go bust.
Robo advisors aren’t a one-size-fits-all solution. Indeed, so many products now exhibit meaningful differences. However, if you are interested in using a low-maintenance form of investment, the time spent researching providers will likely be worth your while.
Robo Advisor FAQs
What is a Robo Advisor?
A robo advisor is a digital platform that provides investment management with little to no human interaction. By cutting costs on staff and active management of funds, the cost saving is passed onto the investor which all things being equal mean better long term returns
Who are Robo Advisors best for?
Robo Advisors were originally targeting young, tech savvy people who had a lower starting investment pot and a fairly simple financial situation. However, today more and more traditional investors are moving across to robo advisors, including some high net worth individuals who are seeking a low cost alternative to a human advisor.
Should I invest with a Robo Advisor?
Robo advisors open the door to investing for individuals who otherwise would have found the cost of investing using traditional methods prohibitive. If you have savings to support your lifestyle for three to six months, then anything over and above that amount is fine to invest with. Not only do robo advisors offer a cost effective solution, they also give investors access to their portfolio 24/7.
How do I choose a Robo Advisor?
Before choosing a robo-advisor you should consider the following:
– Set your goals whether it’s advice on choosing a portfolio or setting a savings goal
– Understand the minimum investment and fees
– How easy is the advisor to use and is it easy to access?
– Understand what types of ETFs are available
– Check which robo-advisors have the best new account deals like Nutmeg as an example
Which is the best Robo Advisor?
The best advisor for you will largely depend on your circumstances, however, these are the advisors that have stood out to us whilst conducting our reviews:
Nutmeg – Great for cost, good track record, complete transparency.
MoneyFarm– offers access to a human investment advisor, simple low-cost fee structure.
How do Robo Advisors make money?
Commonly, robo advisors make money by charging account holders a Management Fee which is either a percentage of the total value of the account, or a flat monthly fee.
How do Robo Advisors work?
Robo advisors use a limited amount of your personal information such as investment timeline, risk profile, and amount of savings, in order to devise the best possible investment strategy for you utilising complex algorithms and artificial intelligence and then automatically investing in Funds and ETFs
Do Robo Advisors beat the market?
It is very unlikely for a robo advisor (or even a human financial advisor) to beat the market on a long term basis, however, the index fund investing strategy will often match the market and the cost to you will be less than if you had engaged the services of a financial advisor. With the additional cost savings this means all things being equal a robo advisor can beat active management returns
Are Robo Advisors any good?
In short yes! Robo advisors offer entry level investors a great starting point and construct portfolios that are just as good (sometimes better) than human financial advisors at a significantly lower cost. The cost savings the translate into more of your being invested which improves your returns
Are Robo Advisors safe?
There is always a certain amount of risk involved when investing, and you must be prepared to get back less than your original investment. However, as an investment vehicle, robo advisors are regulated by the Financial Conduct Authority and many also offer protection from the FSCS.
Can I invest in an ISA with a Robo Advisor?
Yes. Nutmeg for example lets you invest into an ISA account which means you can utilise the tax benefits as well as their low fees
Is there human support available with Robo advice?
Yes, robo advisors always provide their account holders with support, however, this is usually not in the form of financial advice. Whilst there are a small number that can provide you access to a financial advisor, on the whole the level of support offered is in relation to account queries.
Who would be better investing with a human advisor?
Investors with complex financial situations, including tax planning, real estate, and inheritance planning may benefit from the more personalised approach that a financial planner can provide. We can connect you with a Independent Financial Advisor if you feel you need the extra support