Guide to UK Robo-Advisors
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 investment 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 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.
What is a Robo-Advisor?
A robo-advisor is an online investment platform that uses a short survey to determine your investment strategy and a proprietary software program to manage your investment. It’s a hands-off approach to investing 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 about your preferred risk. 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 Offer?
Robo-advisors offer both general investment or trading accounts 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 platform may also offer 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 on your behalf based on things like:
- Your risk preference
- Your current investment goals
- Your projected investment term
Because you won’t do any trading on your own, and you won’t have a broker 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, goals, term).
MPT argues that you can create an “efficient frontier” of portfolios optimised to generate the best available return for each level of 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 low risk with a reasonable return, and investors only want more risk if the reward matches it.
What does it mean in terms of a robo-advisor’s 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.
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 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 so popular among robo-advisors? First, they’re low cost, which benefits both the platform and the consumer. Second, there’s a tonne of investing research underpinning their use: they offer a favourable return compared to tools like 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 fees are higher. As a result, they don’t cater to the crowd who would prefer to accept computer-driven service in favour of lower fees.
The difference can be significant: you could spend 1-3% on 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 was large enough to meet a high quota — not the everyday saver or new investors getting started with their portfolio.
Robo-advisors turn existing financial services products on their head by combining low fees with a low barrier to entry.
A robo-advisor can help manage your tax-deferred investments, like your ISA and your SIPP, and then a general investment account once you max out your annual contributions.
Who Shouldn’t Use a Robo Advisor
A common misconception is that robo-advisors generally aren’t for clients interested in investing in wealth accounts or high-net worth clients. Early versions of the consumer-facing product saw that most 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-advisors 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 fees 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 low-to-no fees until they build up a nest egg for investment.
Are Robo-Advisors Suitable for Wealth Management?
Many of the largest robo-advisors both in the UK and in the global industry generally tout themselves as being perfect for small investors. Their low fees 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?
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-advisor products are becoming more popular across wealth levels, with many high-net worth individuals choosing to split their money between human advisors and computer advisors. Though, 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 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 automatically carries some 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 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-advisors 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 cash are protected up to £50,000 (FCA) and £85,000 (FSCS).
Look for approval from both bodies before you provide your details to any start-up.
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 assets 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 Wealthsimple’s customers’ assets.
It’s worth doing research on the custodial broker or partner bank before opening an account with the robo-advisor.
What are the Benefits of Choosing a Robo Advisor?
Robo-advisors come 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 enjoying 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. Opening an account 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 often as you like. Additionally, robo-investors allow you to choose a portfolio based on your financial goals and your preferred risk, 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 wealth 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 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. 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 preference.
Some robo-advisors are increasingly offering greater personalisation to address this. You can also switch your risk levels and change your goals among some providers.
A second disadvantage is that you won’t get any 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: 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.
Who Are the Best Robo-Advisors?
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 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 robo-advisor that meets 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. The company now operates out of the UK, having received FCA approval in 2015, and it officially opened for business in 2016. In that time, the team received over £60 million in investments from both UK private equity firms and giants like Allianz Global Investors.
The company 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, Monefyfarm sends fund 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 of Moneyfarm’s leaders and advisors 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.
Wealthsimple is a North American start-up that now caters to UK customers throand holds a London office. The company boasts 175,000 customers across the UK, U.S. and Canada and has assets under management of £3 billion. In the UK, Wealthsimple benefits from coverage from the FSCS and is regulated by the FCA. It 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 services 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.
Nutmeg is the UK’s largest robo-advisor and a pioneer in the UK market. When it opened its doors in 2012, it was the first online discretionary 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 2017, the company has £1 billion in assets under management.
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 at a low fee, but Fidelity also assigns a team to monitor the markets and adjust strategies.
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 to 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.
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 caters to a crowd of confident investors: you need a £10,000 minimum investment to get started with a general account (not required for 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 sidze: 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 robos 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 advice and 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: there’s a trillion reasons to have confidence in the product.
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.
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 service offering.
Some of the things to consider include:
- Management fees
- Investment options
- Access to human advisors
- Types of accounts
- Account minimums
The same rule applies to robo-advisors as it does to any other financial account: the management fee doesn’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.
Common Robo-Advisor Terms Defined
What Are Ready Made Portfolios?
Ready-made 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.
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.