A bit of a misnomer, robo-advisors do not actually provide professional financial advice. Instead, they bypass the need for financial advisors by using complex mathematical algorithms to create and manage a range of investment portfolios. As a result, this lowers the cost of managing investments and this lower cost is passed on to the consumer. Robo-advisors in the main use exchange traded funds (ETFs) to invest. ETFs are investment portfolios that track the performance of a pool of investments. They are passive investments in the sense that they try to track the performance of investments, rather than beat it (these are known as active investments). ETFs have low management fees and also low minimum investment levels, making them ideal for first time investors.
Robo-advisors offer a range of different investment portfolios, with different exposures to risk and markets depending on how willing you are to make a loss in the hope of achieving higher returns. One of the first things you’ll do when you sign up to a robo-advisor is answer a series of questions to determine your appetite for risk. These answers are then used to match you to an investment portfolio which matches your attitude to risk. If you don’t like the portfolio chosen, you can always change the portfolio to a less or more risky one.
Robo-advisors are internet based, which means that you won’t be able to walk into a bricks and mortar branch to discuss your options and have face to face contact. Whilst this might feel like a risk to those used to undertaking all their banking in person, it’s important to note that banks themselves are trying to push users to online banking, not least because it saves them money. It also means that robo-advisors save even more money by not having to cover the overheads associated with having a branch, and these savings can be passed on to the consumer.
Being online only means that navigating and using robo-advisors will likely be easier for those who are familiar with online or mobile banking. However, this shouldn’t deter anyone who isn’t familiar with internet banking because many robo-advisors have a live web chat facility where you can speak to a real, living, breathing and speaking customer support advisor. They also have the usual telephone and email contacts if you prefer these alternatives. Sticking to the technology driven nature of robo-advisors, some even have Facebook and Twitter accounts through which you can make contact.
To provide some peace of mind, robo-advisors are regulated by the Financial Conduct Authority and any money invested with them is covered by the Financial Services Compensation Scheme (just like how banks are), so if the company you invest with goes bust, the FSCS will compensate for financial loss. However, though the limit for claiming compensation for financial loss with banks is £85,000 (increased on 30 January 2017 from £75,000), the limit for investments with robo-advisors is £50,000.
Most robo-advisors allow you to invest in a stocks and shares ISA or a general investment account. The current ISA limit in the UK is £15,240 and all or some of this limit can be invested rather than saved in a cash ISA account. Some robo-advisors also offer personal pension services. We’ll look at these in more detail later. You won’t get any other financial services (such as mortgage advice) with robo-advisors.
In the posts that follow we’ll look at the different robo-advisor options available for UK consumers. In the meantime if there’s anything else you’d like to know about robo-advisors, get in touch (using the contact or social media links above) and we’d be delighted to help!