A quick guide to robo-investing
Want some help choosing your investments? In the past that meant paying a wealth manager or independent financial adviser (IFA) to sit down with you and discuss your aims, appetite for risk and investment preferences before they built an investment portfolio for you that they would then monitor, buying and selling investments on your behalf. Now there is a new way to access that expertise without having to pay through the nose for the privilege – robo-investing.
“Robo-investing is the online version of traditional discretionary wealth management services,” says Michelle Pearce, co-founder and chief information officer of robo-investment firm Wealthify. “While traditional wealth management services have typically been the preserve of the rich, robo-investing opens up this service to the mass market at a fraction of the cost.”
In order to engage the services of a wealth manager, you need to have in the region of £250,000 to invest. By contrast, it is possible to start robo-investing with as little as £250. “These new ‘robo-advice’ companies are becoming more popular as they provide a low-cost alternative for those with smaller sums to invest. Many IFAs don’t offer investment services unless you have £30,000 or £50,000 to invest,” says financial expert Andrew Hagger.
What exactly is robo-investing?
Making the most of computers, companies such as Nutmeg, Wealthify and MoneyFarm aim to replicate the services of a wealth manager. You fill out an online questionnaire about your investment requirements and how much risk you are prepared to take with your cash. The robo-investment firm then offers you a selection of investment portfolios to match your needs. You pick one and then your money is invested accordingly. Computers will then monitor your portfolio and make adjustments as needed.
“It’s a great way to get a fully-managed and globally diversified portfolio, without the hassle of building one yourself,” says Ms Pearce. “ A range of asset classes, such as stocks, bonds and commodities, are typically used from across global markets to give a good spread of risk and potential return for investors.”
As well as getting help building a balanced investment portfolio, robo-investing can also cut your investment costs. The annual management charges are far lower due to the online-only nature of robo-investing and the fact you aren’t paying the salary of a manager.
“With Nutmeg, the annual charges are up to 0.95% plus underlying fund costs of 0.19% – cheaper than a traditional wealth manager where you could pay 1.5% to 2% annually,” says Mr Hagger.
That fee difference can really add up. Invest £10,000 and after 10 years – assuming a 7% annual growth rate – you would have £1,700 more if you go for Nutmeg rather than a manager who charges 2%.
How the providers compare
|Provider||Minimum investment||Management fees||Fund fees|
|Nutmeg||£500*||0.3% - 0.95%||0.19%|
|Wealthify||£250||0.5% - 0.7%**||0.28%|
|MoneyFarm||None||0% - 0.6*||0.25%|
*If your portfolio is less than £5,000, you must contribute £100 a month
**Discounts of 5% to 20% available if you get friends to sign up
“We’re giving the high-net-worth wealth management service to everyone via the internet – so we’re cutting fees, talking in plain English, simplifying pricing, and making it all transparent and accessible,” says Martin Stead, chief executive of Nutmeg.
“Our average customer is looking for lower fees, an easier and quicker investing experience, and transparency – on fees and performance – which is so badly lacking in this industry.”
Another advantage of robo-investing is you can access your cash whenever you need it. You have round-the-clock access to your online portfolio and can withdraw cash whenever you like without penalty.
Quick jargon buster
Tracker fund – replicates the performance of a stock market index, so goes up when the index goes up and down when it goes down.
Exchange traded fund – a form of collective investment designed to track a stock market index that can be bought and sold like shares on the London Stock Exchange.
Active fund – tries to produce returns superior to a stock market index by picking the right stock at the right price at the right time.
Can computers really match the results of a smart wealth manager?
“I like the transparency and flexibility of both Nutmeg and Wealthify – the proof of the pudding will be whether the performance achieved will live up to expectations,” says Mr Hagger.
It is early days as yet. Nutmeg is the oldest robo-investor in the UK and it only launched in 2011. Nutmeg’s medium-risk portfolio delivered three-year returns of 9.7% to April 2016. That’s slightly ahead of competitors at 9%, according to Asset Risk Consultants.
Robo-investment firms keep costs down by investing mainly in tracker funds and exchange traded funds (ETFs), which have lower charges than actively managed funds.
The focus on ETFs and trackers means your annual fees are low, but your portfolio is unlikely to massively outperform the market as it could possibly do if it was invested in actively managed funds. The flip side is your portfolio is likely to be less volatile as you avoid the bad choices that fund managers can make. However, you’re still reliant on the robo-adviser selecting the right funds at the right time.
It’s possible to invest your individual savings account (Isa) allowance or pension via robo-investment firms, meaning you can cut your costs and invest tax-efficiently at the same time. All of the three big players offer Isa investments, while Nutmeg allows people to invest their private pension via the site too.
Your money is also protected as Wealthify, Nutmeg and MoneyFarm are all regulated by the Financial Conduct Authority and are covered by the Financial Services Compensation Scheme. This means the first £50,000 of your investments are protected if the company goes bust.
The advice given by these robo-investment firms is also classed as regulated, which means if things go horribly wrong you can take it up with the Financial Ombudsman Service.
But not everyone is a fan. Alex Whitson, chief marketing officer for VouchedFor, says: “Robo-advice remains a much hyped area, though there is some way to go before this hype is justified. Lowering the cost of advice and making it more accessible are worthy aims, provided this doesn’t come at the expense of consumers getting the best advice for them.
“We strongly believe that everyone is better off with great financial advice, and are in favour of the increased accessibility that automation can offer, but a one-size-fits-all approach risks being restrictive and generic. Each one of us has very different financial and life challenges, so relying too heavily on technology may lead to people not receiving sufficiently personalised advise or, worse, being misinformed.”
Is it possible to invest even more cheaply?
Yes, through DIY investing, but you would have to take on the responsibility of building a portfolio yourself.
“Robo-advice allows you to set your risk level and sit back and allow someone else to manage it. Of course, you could do this more cheaply if you were to manage your own portfolio online through an investment platform such as rplan where the annual fee is just 0.35%, although you have to select your own funds and manage them,” says Mr Hagger.
Ultimately, robo-advice offers you the basic services of a wealth manager without the cost. Certainly, it’s worth considering if you aren’t confident building and managing your own investment portfolio.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.