3 Reasons to Invest in Robo-Advice
As we prepare to launch our ‘Robo-Advice’ section on Orca Money, which will include guides and product comparison, we’re analysing this new and innovative method of investing, bringing you a couple of reasons why you could – should you decide to – invest in robo-advice.
1. Cost-Effective Investing
If you have invested traditionally, and with the aid of an IFA, you will be privy to the costs associated. Often 2%+ Assets Under Management (AUM) annually. This can burn into your portfolio, and frankly you might be wondering why their advice is so golden. It can be though, that’s the debate between IFAs and robo-advisers.
With robo-advice, the robo-adviser will typically take a fee of 0.25% – 1% fee on AUM each year. This fee, according to robo-advisers in the UK, is fair and always stated upfront.
Here is a breakdown of fees from a couple of major robo-advisers operating in the UK:
This robo-adviser charges the average ETF (fund) fee of 0.25% up to £10,000 AUM and waivers its own fee. So you’d pay £25 in a year.
MoneyFarm fees are FREE on first £10k.
The longest standing robo-adviser in the UK, Nutmeg has built a renowned brand amongst investors seeking a low-cost alternative as they search for the best interest rates on the market.
This robo-adviser charges fees ranging from 0.3% – 0.95%.
If you invested £50k your weekly charge would be just £7.21 or 0.75% AUM.
Irrespective of funds invested in Scalable Capital, your fees will remain consistent. Fees are charged for investment management, account management, custodial charges and all trading costs.
0.25% (ETF fee) + 0.75% Scalable fee = 1% AUM.
2. Discretionary Investment Management
If you’re new to investing and are searching for returns – maybe finding the best savings rates on the market has proved futile and it’s time to venture into investing to find yield? – but don’t quite know where to start or have the expertise to make smart investment decisions, then robo-advice offers a hands-off solution.Here are the steps to investing in a robo-adviser:
a) online questionnaire
When opening an account with a UK robo-adviser, you will be asked a series of probing questions. These are extremely important. They determine your risk profile as an investor.
b) portfolio allocation
Once your risk profile is determined – let’s use MoneyFarm as an example – and you’re deemed to be an ‘Adventurous’ investor (E.G), then you will be allocated a portfolio in-line with this profile. This model portfolio is comprised of ETFs. An ETF is a fund that tracks an index of an asset class, such as equities or bonds, and trades on a stock exchange.Here is a screenshot of an Orca Money team member’s portfolio (they gave permission, don’t worry):
Figure: example MoneyFarm portfolio view
c) auto-rebalancing of portfolio
Once you’ve answered your questionnaire, and you’ve been allocated a portfolio, and you’ve submitted your personal details for checks and approval, and finally you’ve deposited the min. investment or above, your portfolio will start working your money. You have a secure login and can witness as your portfolio is automatically adjusted over the term of your investment in-line with market fluctuations.
3. Transparent Investing
There’s a resonating feeling amongst investors, and more broadly UK society, that IFAs and finance professionals operating in the wealth management sector are not to be wholly trusted. Whilst we don’t fully subscribe to this sentiment (necessarily) it is evident that an investment mechanism, like robo-advice, which charges sub 1% AUM compared to IFA charges which are twice as much (plus) is a welcome vehicle for achieving yield with less hassle and at a lower cost.
All robo-advisers purport to be fully transparent, something which is a refreshing sentiment in light of recent years of fishy banking misconduct and opaque traditional investment vehicles.
As an example, Scalable Capital’s strap-line is: ‘No lock-in, no hidden fees, full transparency’
If you are not quite prepared to take a capital risk on an alternative investment – even on the best alternative investment in the UK, peer-to-peer lending – but are more prepared to invest in liquid, tradable ETF portfolios, through a cost-effective discretionary manager, then robo-advice is a potentially smart place to start. If that was a lot to take in, let’s put it more simply. A digital investment manager will look after your capital, ensuring it constantly maximises the returns your risk-allocated portfolio provides, at a much lower cost than an IFA would.