How to Compare Robo-Advisers
With only a matter of days until the launch of the ‘Robo-Advice Comparison’ section of Orca, find out how to compare robo-advice here.
A robo-adviser is an online investment manager that marries your investor risk profile, as determined by an online questionnaire, to a portfolio of Exchange Traded Funds (ETFs), before managing your money on a discretionary basis. This streamlined, hands-off approach allows the expertly devised algorithms and in-house experts to manage and rebalance your investment portfolio for you, so you and an IFA don’t have to.
Traditionally, this investment management is left to an Independent Financial Adviser (IFA). However, the young and burgeoning field of robo-advice offers a more cost-effective and, in many respects, simpler service that more and more investors are taking advantage of. It may not be everyone, so ensure and research the robo-advisers thoroughly, comparing all aspects.
Here we will take you through just what to look out for when comparing robo-advisers.
One of the most attractive aspects of robo-advice compared to traditional IFAs is the difference in fees charged for handling your investment. The average financial adviser will cost you around 2-3% of Assets Under Management (AUM) annually. This hefty levy can soon eat in to your portfolio, especially for larger investments. Robo-advisers, on the other hand, will typically charge between 0.25% – 1% each year for their services.
MoneyFarm, who arrived in the UK from Italy earlier this year, charge between 0.25% and 0.85% of AUM annually. MoneyFarm always waives its fee on the first £10,000 invested. Scalable Capital charges a flat fee of 1%, while industry leader Nutmeg charges between 0.30% and 0.95%. These charges depend on the amount you invest.
Moneyfarm fee: 0.25%-0.85% (fee waived on first £10k invested)
Scalable Capital fee: 1%
Nutmeg fee: 0.30%-0.95%
NB: Fees are calculated depending on the amount you invest and are a percentage of your AUM per year.
With Scalable Capital, you will go through three stages in the suitability questionnaire – each comprised of three questions – assessing your level of risk by analysing your objectives, experience and finances. You will then be assigned to one of 26 risk categories, measured with a Value-at-Risk (VaR) score, after which you can further refine your portfolio strategy. A VaR score is a professional risk measure used in the finance industry. More information on Scalable’s VaR by clicking the link below.
MoneyFarm also has a three-stage questionnaire, however you will be placed under one of six risk profiles, ranging from ‘conservative’ to ‘bold’. You can refine your profile via your login client dashboard by selecting one of three risk sub-levels within your bracket.
Nutmeg’s questionnaire follows an agree-disagree format comprised of 11 questions, after which you will be assigned to one of seven risk categories which will be mapped to 10 available portfolios.
As mentioned above, each robo-adviser will assess you risk appetite as an investor through a questionnaire, assigning you a risk profile accordingly (often conveyed as a number). Your profile will then be married with a corresponding portfolio of Exchange Traded Funds (ETFs) – funds that track an index of an asset class, such as an equity or bond. – spread across a range of asset classes, such as stocks and shares or cash.
Scalable Capital: 14 ETFs (portfolio number not available)
ETFs & Asset Allocation
An asset class refers to the type of asset your money is invested in. These include bonds (e.g, government and corporate), currencies and equities, primarily. Robo-advice services deal in ETFs that track these markets. Investments are diversified across a number of ETFs, and thus asset classes, to mitigate risk and increase returns. Your portfolio will be continually reviewed and altered by your robo-adviser in order to maximise its performance.
With Nutmeg, for example, a cautious investor’s profile will favour bonds and cash as they are seen to be less risky than other asset classes. A more aggressive investor’s portfolio will contain more developing markets equities, which are considered to be more volatile but better in providing yield. The composition of ETFs will correlate with your individual risk profile.
The performance of any robo-advice service that deals in ETFs can be primarily judged by two main factors: market performance and investment selection.
Given that the underlying ETFs track market indexes, the performance of your investment is subject to market conditions. These conditions are in a constant state of flux and can be influenced by several external factors, such as politics and world events, which are unpredictable. Ultimately, robo-advisers such as Nutmeg and MoneyFarm handle your portfolio, so you are entrusting them to allocate funds appropriately in accordance with your risk profile and automatically rebalance it.
Looking at Nutmeg and MoneyFarm’s annual returns over the past three years, this volatility is shown. MoneyFarm’s portfolio, for example, returned 8.3% in 2014, followed by 1.7% the next year and 15.9% for the year-to-September 2016. These stats are based on MoneyFarm’s returns in the Italian market, prior to launching in the UK in February of this year. Nutmeg’s returns for a mid-level portfolio over the same period show fluctuations from 5.1% in 2014, a loss of 0.4% in 2015, followed by 10.4% in the last year.
Like MoneyFarm, Scalable Capital has not yet been trading in the UK for a full year, so under FCA rules, there is no annual data to analyse. They are, however, generating £1.5m – £3m AUM growth per week and have an average individual investment of £35k-£40k.
Robo-advice is a relatively new investment arena and some of the main UK players (Nutmeg, MoneyFarm and Scalable Capital) are already making headway with investors seeking an alternative. Lower fees and ease-of-use are appealing to investors disillusioned with expensive and time-consuming IFAs, but the real question is whether or not you can get comfortable with entrusting your capital investment to an algorithmically functioned, digital investment manager.