Robo-advice cuts the cost of investing - but a DIY approach may be cheaper

16 January 2019

Robo-investing apps are making investing easier for a new generation. You can put your money into stock markets around the world in minutes – but fees could eat into your profits

Robo-investing is very simple: you just download an app, tell it a bit about yourself and then pick the investment strategy you want to follow from a range of limited options and away you go.

It generally takes much less time – and money – than meeting a financial adviser who will ask about your individual circumstances and come up with a strategy unique to you.

There is more than £300 billion invested with robo-advisers around the world, and the UK market is one of the largest and most advanced.

But are investors who are using these apps getting the best possible value for money?

When robo-advisers are a good option

Along with putting some traditional financial advisers out of work, robo-investing apps are helping a new generation of investors. They’re making it easier and cheaper to begin; you don’t need to be an expert investor; you don’t need masses of capital either; and many robo-platforms will let you get started with very small amounts of money.

“There are many benefits of investing with a robo. You can check your portfolio, withdraw and deposit, all at a touch of a button in the palm of your hand,” says Daniella Camilleri, comms and community lead at robo-adviser Plum.

“You get access to expertly managed funds at a much lower entry point. With Plum, you can invest in Legal & General and Vanguard funds with as little as £1.

If you went direct [and were investing a lump sum], you would have to invest at least £500 for access to the same funds,” Ms Camilleri adds.

Robo-advisers include Nutmeg, Wealthify, Moneyfarm and IG.

Limited choices can make life simpler

With robo-advisers, you’re only able to pick from a limited number of funds and strategies, selected by the provider.

Most robo-advisers offer low-, medium- and high-risk strategies. Some of the more established ones offer broader ranges, but they are all limited in the funds they invest in.

There are advantages to this: the robo-adviser can change the funds in a strategy you’ve picked, without you having to do anything.

Holly Mackay, chief executive of investment website Boring Money, says: “The biggest benefit of a robo is not the initial investment help, but the diversification and ongoing management. We have looked at performance and risk in robo-advisers and we can see the benefits of diversification demonstrated in lower risk compared to the FTSE 100, as an example.”

Robo-advice cuts the cost of investing - but a DIY approach may be cheaper

What about robo fees?

One drawback of robo-investing is the cost: you pay fees in the underlying funds as well as paying the robo-adviser’s own fees, which, when combined, are not the cheapest way of investing.

If you have the confidence and knowledge to do it, taking a DIY approach using an online investing platform can work out cheaper.

Laura Suter, personal finance analyst for investment platform AJ Bell, says: “The main difference between a robo-advice offering and a DIY option is that with robo-advice there is a risk-analysis process that determines how much risk the investor is willing to take and the investment portfolio is then matched to that. However, this comes at a cost and if an investor is happy to make their own assessment of how much risk they want to take, a DIY option can deliver a very similar investment solution at two-thirds of the price.”

You can make substantial savings by taking a DIY approach, according to Ms Suter: “A robo-advice service can cost more than 1% a year. If you are happy to pick a broad risk category, such as cautious, balanced or adventurous, you can get a very similar multi-asset portfolio on a DIY platform for around 0.65% a year. That might not sound like a big difference, but over a 40-year investment, such as a pension, it can have a significant impact on your pot.

“Based on saving £250 a month gross into a pension (£200 contribution plus £50 basic-rate tax relief) and assuming a 5%-a-year investment return, the difference between a 1% charge and a 0.65% charge will cost you £27,000 after 40 years,” Ms Suter adds.

“Ask yourself how much spare time you have to manage a fund”

Where to start if you do go it alone

If you want to take a DIY approach to investing and are just getting started, Moira O’Neill, head of personal finance for investment platform Interactive Investor (Moneywise’s parent company), recommends investing in funds rather than individual stocks and shares.

Ms O’Neill says: “When starting investing, I would go for a fund that spreads your investments as widely as possible for the lowest cost.

“The Vanguard LifeStrategy funds can do this for you. They have very low ongoing charges of just 0.22% a year. And they are like ready-made portfolios, giving one-stop access to the world’s equity and bond markets,” she adds.

If you’re unsure about which approach is right for you, Ms Mackay sums up what you need to consider.

“The biggest question people need to ask is how much time they can spare to manage this,” she says. “If you’ve got time to learn more about investing, a DIY approach can save you money over the long term. However, if you just want to get cracking, then using a robo-adviser is quick, easy and still cheaper than traditional financial advice.”

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“I didn’t like the ‘socially responsible’ fund my robo-adviser picked”

Todd Ferguson, 43, from Canada tried saving for his retirement with a robo-adviser’s socially responsible investing (SRI) retirement savings plan.

“I wanted to find a way to save up for my eventual retirement that didn’t compromise my belief in human rights or values as a person,” he told Moneywise.

Todd started by putting the minimum $5,000 (£3,903) into his account to see how it went before considering a larger investment. But the lack of choice over what his money was being invested in drove him to quickly close his account and adopt a DIY approach to investing.

“I soon discovered the ‘socially-responsible’ fund it put me in included investments in companies owned by the Turkish government, which I consider to be a dictatorial, fascistic regime,” he says. He was also unhappy with the Turkish government’s policy toward the Kurdish people and the idea of its collaboration with Isis in the past.

“I asked it to divest me from that particular part of my portfolio and it refused, telling me my only choice was to invest in everything in its SRI or choose a different product altogether. I shut the account. It was a bit of a learning curve for me, the lesson being that the more you remove yourself from decisions about what happens with your money, the more likely you won’t be happy with the decisions made on your behalf.”


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