What are robo advisers?

I say robo adviser, you say digital investment manager

Robo advisers are a new breed of investment websites that make investing super easy.

I love the idea of robo advisers, even though they aren’t run by robots and (mostly) don’t give advice.

The theory is great for new investors. You just answer a few questions online, choose a level of risk, hand over your cash and er, that’s it. The robo adviser takes care of everything else and all for relatively low fees.

Who are these robo advisers?

Think names like Nutmeg, Moneyfarm, Wealthify, Scalable Capital, True Potential, Wealthsimple, Moola, NetWealth and Evestor.

Robo advisers, or ‘digital investment managers’ as they’d rather be called, are the ready meals of the investment world.

Nicely packaged, clear instructions, easy to prepare and relatively low cost. Great for anyone who doesn’t want the time and faff of choosing their own funds and shares, or the expense of using a financial adviser to cook up an investment portfolio for them.

Quick to get started

Seriously, you can sign up via their slick websites in a few minutes, without needing to know much more than your bank details.

Equities? ETFs? Nah, just answer a few questions about how much you want to invest and for how long. With some robo advisers, you get to choose how risky you want your investments to be, from bland to really rather racy* (*Other terms may apply). Others suggest which option will suit you best.

If you choose more risk, you hope for higher returns, but will also face bigger drops if stock markets fall. As a rule of thumb, the longer you are investing for, the more risk you can afford to take.

But otherwise, you can’t pick and choose the contents, you just get what you’re given.

Three cheers for guiding people through questionnaires, and offering a limited range of choices. I think it makes investing way more accessible than choosing  between gazillions of funds and shares elsewhere.

Relatively low cost

Praise be that the robo advisers are upfront and transparent about their costs.

Costs are pretty low at around 1% a year all in – so not completely bargain basement, DIY low, but cheaper than paying a financial adviser. That 1% includes charges by the robo advisers, fees for the funds they use, and a tiny amount for trading fees when tweaking your investments.

Fees are low because websites cost less to run than a whole team of human advisers. Robo advisers also tend to invest your money in funds that are run by computers (typically called ‘passive’ ‘tracker’ or ‘index’ funds that aim to match stockmarket performance), rather than more expensive funds that are managed by humans (‘actively-managed’ funds, that try to beat stockmarket performance).

Robo advisers: not robots and (usually) don’t give advice

What do they actually do?

Robo advisers take your money and spread it right round the world in a mix of different shares, bonds and other investments. The exact mix will vary depending on which robo adviser and which level of risk you choose. This kind of global diversification is A Good Thing, compared to sticking it all in shares in a single company like Sainsbury’s.

Companies including Nutmeg, Moola, Wealthsimple and Wealthify also offer ethical or socially responsible options, if that floats your boat, although typically with higher fees.

Previous post: What is ethical investing?

Crucially, robo advisers then continue managing your money in future, so you don’t have to worry about buying and selling stuff to keep the same level of risk.

If you know you want a stocks & shares Isa, for example, robo advisers make it easy to set one up. What they can’t do is take a look at your whole financial picture, suggest how to sort it out and perhaps point out that you should be doing something completely different.

Chance of cash back

Robo advisers are on a crusade to recruit customers. Some companies offer tempting cashback during March, trying to lure investors keen to use their individual savings account (Isa) allowance before the tax year ends on April 5. Each year, you can stash up to £20,000 in an Isa, where the tax man can’t touch any income or growth.

Now, I would never suggest choosing where to invest significant sums just based on cashback. Get it wrong, and any cashback could be eaten up in poor performance and expensive charges.

But if you’ve already decided to invest in a robo adviser, do check out whether you claim some cashback, and look out for any small print about how much to invest and how long to stay invested.

Right now for example, Nutmeg is offering £110 via TopCashback*, for new customers who open a Nutmeg stocks and Shares ISA (not a Lisa) with either £500 and a direct debit of at least £100 a month, or a £5,000 lump sum. This is better than my referral link for Nutmeg, where you only get 6 months without management fees, while I get a handy £100.

Moneyfarm is also offering between £50 and £600 cashback to new and existing customers, depending on how much you invest in an Isa before 6 April. More details on the Moneyfarm Brexit ISA here.

You can get a £50 boost with Wealthify if you sign up via this link and invest £500 or more for at least three months (and I’ll get £50 too). 

Don’t get shot in the foot

The downsides

The robo advisers are small and very new.

Most only popped up in the last two or three years. In investment terms, that’s the blink of an eye. I always suggest people invest for at least five years and ideally longer. Heck, I put some of my kids’ money in an investment that’s over 150 years old (waves to F&C!).

Nutmeg is the granddaddy of the robo advisers, but even Nutmeg was only launched in 2011. Otherwise, Scalable Capital started in 2014, Moneyfarm, Moola, Netwealth and Wealthify launched in 2016 in the UK, joined by Evestor and Wealthsimple in 2017. We’re talking toddlers here. Even Nutmeg is only at primary school.

The robo advisers are picking up customers but they’re still tiny compared to the websites traditionally used by DIY investors. Of the old guard, giant Hargreaves Lansdown held £86 billion of customer money at the end of 2018, followed by Interactive Investor with around £20 billion. In comparison, Boring Money reckons all the robo advisers together only manage about £3 billion.

Meanwhile Vanguard, whose LifeStrategy funds I’ve written about as an alternative low cost one stop shop for new investors, is one of the largest investment companies in the world, with about $5 trillion (yes, trillion) in global assets under management.

Previous post: Which Vanguard LifeStrategy fund is right for you? [Collaborative post]

So however slick the websites, bear in mind that the robo advisers are mainly start up businesses that haven’t been around long enough to ride out big stock market shocks.

Some start ups are bound to disappear in future, while others may be snapped up by big brands. Aviva, the insurer, has already taken a stake in Wealthify, while JLT, the employee benefits company, bought Moola.

Meanwhile the high street banks are just starting to dip their toes in robo advice waters. UBS launched, and then closed, UBS SmartWealth. NatWest launched NatWest Invest last November, while Santander’s Digital Investment Adviser and HSBC’s  ‘My Investment’ both started towards the end of 2018. Nationwide is also trialing its own online investing service.

The other downside is that robo advisers rarely publish performance figures, with Nutmeg and Moneyfarm as honourable exceptions. Admittedly, comparing between robo advisers is tricky because they all use different investments in different combinations for different risk levels. But I’d still like to know whether any of their investments go up!

Overall

I love the theory of robo advisers, with well-designed websites, helpful questionnaires, limited choice and relatively low fees. It all helps make investing more accessible and affordable.

But I’m wary about their limited track record. I also find the lack of performance figures frustrating – so do watch out for my follow up post about the battle of the robo advisers!

Next post: Battle of the robo advisers: Nutmeg, Moola and Wealthify vs Vanguard

Now – over to you. Have you invested with a robo adviser? What attracted you? And what would put you off?

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