Rising to prominence in 2015, Robo-Advice has established itself within the UK wealth management sector. Traditionally, and still, IFAs are paid fairly hefty sums to manage the assets of a client. The cost to an investor can be in the region of 1-3% of Assets Under Management (AUM) per year. For wealthy people, this may not be a problem, but for the 16 million (est) UK people stuck in the “financial gap” this is not a viable solution. Robo-Advice allows savers and investors who are sick of miserly savings rates and/or expensive Financial Advisers to create and invest in suitable investment portfolios without the excessive cost.
Your investment into a portfolio of assets (ETF-based) is determined by “robots”, or algorithms, which marry your appetite for risk and understanding of investments to a portfolio.
With so many questions – and rightly so – about this new entrant that is robo-advice, let’s delve a little deeper into this new kid on the block.
Who is robo-advice for?
According to the ‘CFA Fintech Survey Report April 2016’ – which surveyed over 3,000 CFA institute members – the group, Mass-Affluent investors, will be most positively affected by robo-advice (70% surveyed believe). This is compared to Institutional Investors and Ultra High Earners who will largely be unaffected due to their requirements for specific, tailored personal advice. High Net Worth (HNW) investors will be positively affected according to 40% of those surveyed. You will likely know if you’re a HNW or above (Ultra High Earner), if you’re not, then you may well fit into the categories most positively affected by robo-advice.
CFA Institute ‘Fintech Survey Report’, April 2016
Sectors robo-advice affects
With regards to sectors most affected by robo-advice, it is very clear that Asset Management will be impacted the most, with Banking believed to be most affected by only 16% of those surveyed, with other sectors falling further below.
CFA Institute ‘Fintech Survey Report’, April 2016
The purpose of robo-advice is in the name, so it is unsurprising that Asset Management, which is predicated upon providing human advice to investors in order to prescribe suitable investment products, is considered to be the most likely sector to be impacted.
One of the largest robo-advisor and online wealth managers in the UK prides itself on opening up investing to the masses, without the overbearing and costly influence of an IFA:
We want to empower people to take care of their finances and manage them independently in a simple and efficient manner.
– Paolo Galvani, Chairman & Co-Founder, MoneyFarm
How does robo-advice work?
In a bit of an over-simplification, robo-advice is the replacement of face-to-face savings and investment advice with online, automated guidance and execution. There are no literal “robots” with pneumatic arms managing investments, but rather clever algorithms marrying your risk profile with portfolios and investing your funds on a discretionary basis.
Key features of robo-advice investing
- Detailed online questions determine your suitability/risk profile.
- Your understanding of investments, affordability and capacity for loss helps establish your appetite for risk.
- Suitability report is compiled which matches you with diversified, ETF-based portfolios.
Discretionary investment management
- Your funds are invested by a team of experts which manage your portfolio on a discretionary basis, so your involvement is limited.
Restricted personal advice
- Some robo-advisors offer restricted personal advice, taking into account your personal circumstances – this includes tax contributions etc.
- Wealth Horizon and Money On Toast provide recommendations on a restricted personal advice level, but robo-advisors like Nutmeg do not.
Who are the main UK robo-advisors?
Customers answer a high-level questionnaire, determining their suitability to a choice of MoneyFarm’s six risk graded ETF-portfolios. Funds are then allocated to the managed portfolio where you are then not allowed to select investments, but you can fine-tune exposure to risk in a given portfolio. Boasting the lowest fees in the market – 0% to 0.6% – MoneyFarm allows investors to start investing from as little as £1, and through a General Investment Account or ISA. Certainly one to watch and consider for those new to investing!
Fees – 0.25% Assets Under Management (AUM) per annum (p.a)
NO FEES on the initial £10,000 invested.
Nutmeg offers proprietary risk profiling by offering simplified investment advice and not restricted personal advice. Your funds are allocated to one of 10 portfolios based on your risk appetite. Funds are then managed on a discretionary basis similar to that of MoneyFarm.
Fees – 0.3% to 0.95% AUM p.a
Recently purchased by Asset Manager giant, Aberdeen Asset Management, this robo-advisor could be set for big things. However, with personalized risk assessment not too dissimilar to MoneyFarm there isn’t much that ensures it stands tall above the rest. A min. investment of £1,000 suggests the more sophisticated investor would benefit from this robo-advisor.
Fees – 0.25% (initial) and 0.75% AUM p.a
With a slightly different approach to suitability, you are asked to self-assess your appetite for risk after choosing which plan you want to invest in: Regular or ISA plan. After choosing your investment amount, with a min. £250 over min. 2 years, you select your ‘Investment Style’ on a scale of 1 (cautious) to 5 (adventurous).
Fees – 0.5% to 0.7% AUM p.a with discount for referrals
This robo-advisor is tailored to the more sophisticated investor, with a min. investment of £5,000. Their tech focus allows them to boast an efficient risk profiling, as their algorithms adjust portfolios automatically. The ‘investment strategy’ section of the account setup is fairly late in the process, ensuring the less sophisticated investors are prevented from investing early on – assuming they do not qualify.
Fees – 0.75% AUM p.a
Benefits of robo-advice
It is the ease-of-use and cost-effective nature of robo-advice that makes it so appealing to the Mass Affluent, but the limited human interaction and tailored advice that restricts its appeal to the Institutional and Ultra High Earning investors.
With a traditional IFA, you may incur a setup fee, an annual fee of circa 1% (min.) AUM, and potential other fees. These charges can quickly accumulate and burn a whole in your funds. With some robo-advisors charging as little as 0.25% p.a (MoneyFarm), it is little wonder the mass affluent and other investor demographics see the appeal of robo-advice.
With an online question-led approach to an investor’s risk appetite and an account displaying the performance of an investor’s portfolio, robo-advice can offer a real-time, 365-day a year view of your investments. Fees are displayed upfront, and are significantly less than traditional IFA charges.
Ease of use
Setting up an account with a robo-advisor is quick and efficient. It is you, the investors, responsibility to answer the suitability questionnaire accurately, thus determining your risk profile. The algorithms have been designed to ensure the answers to questions correspond with the risk-graded portfolios and, what’s better, you can visualise your portfolio and how it will perform before even depositing a penny!
Other benefits, as recorded in the ‘CFA Institute Fintech Survey Report’:
It can be a timely and costly exercise selecting a traditional IFA to manage your investments. With robo-advice, investors can quickly and effectively commence investing and start earning. Beat the record-low savings rates, avoid expensive IFAs, and start earning.