A guide to robo-investing

Published by The Moneywise Team on 06 July 2016.
Last updated on 04 September 2018

Robo-investing

Many investors are willingly controlled by robots – following the advice of low-cost automated investment sites such as Nutmeg.

By Ruth Jackson and Holly Black

Many of us enjoy the fact that we can do everything online these days, whether it’s keeping in touch with friends, buying groceries or checking our bank accounts. This and the desire for simple, convenient, low-cost options means that more and more people are investing online now too.

In the past, starting an investment portfolio meant meeting a financial adviser in person and filling in paper forms about your aims and your appetite for risk. Now, time-pressed Brits can start investing with a few taps on their phone or laptop and set up an account with as little as £1.

So-called ‘robo-investing’ is one such way to invest online. It’s a low-cost, simplified way of investing where a computer does much of the hard work for you.

Richard Bradley, head of data at investment comparison website Boring Money, says: “In essence, robo-advice sites build diversified portfolios for investors and then maintain them for you. Some take new investors through questionnaires and recommend a suitable portfolio, others let the investor pick the one they feel is most appropriate.”

One reason that robo-advice is becoming more popular is because it lets you start investing with as little as £1, compared to many financial advisers who require you to have £50,000 or more to become a client.

It’s about cutting fees, talking in plain English and accessible investing

Recent research suggests that millennials – those aged between 18 and 34 – may be the most likely to use robo-investing tools. A survey carried out in March 2018 by robo-adviser Investec Click & Invest found that 75% of this age group is looking to increase the amount they invest, with 33% hoping to invest their full £20,000 Isa allowance this year.

A third of those surveyed say robo-advice lets them feel more in control of their savings, with one in five confident they can achieve better returns than through their company pension scheme.

The pros of robo-investing

Jeremy Fawcett, head of platform research firm Platforum, says: “The traditional wealth management industry doesn’t cater for everyone and some people will find digital options more accessible. These sites provide a simple route into sensible investment portfolios as well as the slick digital user experience that people expect these days.”

Martin Stead, chief executive of robo-adviser Nutmeg, adds: “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.

“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 major advantage of robo-investing is that 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.

“I like the transparency and flexibility of both [robo-advisers] Nutmeg and Wealthify – the proof of the pudding will be whether the performance achieved will live up to expectations,” says finance expert Andrew Hagger.

But 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 has delivered a return of 41.1% over the past five years, equivalent to 7.1% a year. Meanwhile, research by Boring Money found the average medium-risk robo-portfolio returned 6.9% last year. However, in comparison, the FTSE 100 index of the 100 largest UK-listed companies was up more than 13%.

But Mr Bradley adds: “Robo-advisers haven’t been around for long, so comparing the performance between the different websites is difficult. But, rather than chasing stellar returns, one of the major advantages of using a robo-adviser is minimising risk – so you should get a smoother ride than if you just invested in the stock market.”

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 if your portfolio is only invested in tracker funds and ETFs it can’t outperform the market, as it could possibly do if it was invested in strong 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 and your investments will likely be better diversified. However, you’re still reliant on the robo-adviser selecting the right funds at the right time.

While some experts argue that fund managers can often outperform tracker funds, these managers are usually expected to do significantly better to warrant their higher fee. For example, if you invested £10,000 for 10 years – assuming a 7% annual growth rate – you would have £1,700 more if you go for Nutmeg, where total fees are 0.95% a year, rather than a manager, who might charge 2%.

The robo-advice downside

But not everyone is a fan. Alex Whitson, managing director of IFA-finding platform VouchedFor, says: “Robo-advice remains a much-hyped area, though there is some way to go before the level of hype is justified.

“Lowering the cost of advice and making it more accessible are important aims, provided they don’t come at the expense of consumers getting the best advice for them. We’ve found the vast majority of people still want some level of human interaction in the advice process. Why? We all want the reassurance that our unique financial and life goals have been fully understood and we want as much validation as possible that the proposed course of action is the right one.

“Technology is doing a great job of breaking down barriers to advice, but I believe pure-play robo solutions (without any human input) are destined to fail, other than for those people looking to invest small amounts of money. We believe affordable hybrid (humans plus technology) solutions are the best way to address the so-called ‘advice gap’.”

Mr Fawcett adds: “The disadvantages are the lack of human interaction, which is important to some people, and the safeguards embedded in full-blown regulated advice. There are also other ways to get hold of good ready-made investment solutions from online services, which may be less expensive.”

How do robo-advisers compare?

Robo-advice fees vary from site to site (see the table below for a comparison of fees at some of the major providers) and often depend on how much you have to invest – typically, the more you have, the less you will pay – or how risky your investment choices are.

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, for example, – Moneyfarm, Nutmeg and Wealthify – offer Isa investments, while Moneyfarm and Nutmeg allow people to invest in their private pension via the sites too.

Your money is also protected with these three providers as they are all regulated by the Financial Conduct Authority and are covered by the Financial Services Compensation Scheme (FSCS). This means the first £50,000 of your investments are protected if the company goes bust. However, as with all investments, the cash value can go down as well as up, and the FSCS does not protect against this.

How robo-advisers’ fees compare

Provider Minimum investment Management fees Fund fees
ETFmatic £100 0.12%-0.48% 0.11%-0.15%
Evestor £1 0.35% 0.15%-0.17%
IG Smart Portfolio £500 0.1%-0.65% 0.22% average
Investec Click & Invest £10,000 0.35%-0.65% 0.6% average
Moneybox £1 0.45% + £1 per month 0.22%-0.24%
Moneyfarm £500 0.4%-0.7% 0.3% average
Moola £50 0.75% 0.15%-0.31%
Nutmeg £100-£5,000 (i) 0.25%-0.75% 0.21% average
Plum £1 0.15% + £1 per month 0.22%-0.9%
Scalable Capital £10,000 0.75% Up to 0.25%
True Potential Investor £1 0.40% 0.76% average
UBS SmartWealth £15,000 0.1%-0.25% 0.87%-1.93%
Wealthify £1 0.4%-0.7% 0.21% average
Wealthsimple £1 0.5%-0.7% 0.18%

(i) Depending on product. Source: Moneywise, 24 July 2018.

However, customer service should be taken into account as well as cost. Users of Boring Money place Moneyfarm and True Potential Investor as the best sites for service, both scoring 4.5 out of five.

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.

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 and picking the cheapest platform for your needs 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, although here 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. So it’s certainly worth considering if you aren’t confident about building and managing your own investment portfolio.

RUTH JACKSON is a freelance personal finance journalist who writes for The Times and was the deputy editor of Moneywise

HOLLY BLACK is a freelance personal finance journalist who has written for Money Observer, The Telegraph and FT Adviser