Roboadvice – the basics

Robo advice is a fairly new, fast-growing part of the investment market, and plenty more growth is expected. Many of the ‘robo’ platforms use ETFs to implement their investment ideas, so they can be a very easy way to build an ETF investment portfolio.

What is a robo advice?

Robo advice is an attempt to make investment easy. If you go down the robo route, you shouldn’t have to spend a lot of time working out how to invest your cash. And it may also mean you don’t have to pay out to consult a financial adviser.

The basic idea is you visit a robo advice site and fill out an online questionnaire. You’ll be asked about your attitude to risk and how much money you have and then most robo sites will produce a portfolio of funds or ETFs that you can invest your money in. Normally you then let the robo site manage that portfolio for you.

No two robo sites are exactly the same, so the above description isn’t 100% accurate for all sites, but it gives you the gist of how they work.

We should also say that ‘robo advice’ is a pretty misleading name. There’s normally at least some human involvement in the investment process, and the sites usually aren’t offering proper financial advice. Better names for the sector include ‘robo investment’ and ‘digital wealth management.’

Is it a good idea?

The best thing about robo advice is that it fills the ‘advice gap’ – at least partly, anyway. Since the Retail Distribution Review was implemented in 2013, financial advisers have to quote hourly fees for their services and that’s put off a lot of consumers from using their services. Some have become DIY investors instead.

There’s a decent chance that DIY investors will get the risk all wrong. They might leave too much money in cash and not get a big enough return to fund their retirement or they may take too much risk and be punished for that. With robo advice, you should end up with a portfolio that is broadly in line with your risk profile.

That said, most robo sites are not offering full financial advice. There’s no face-to-face meeting with the customer, and there’s no in-depth investigation of the customer’s financial aims or circumstances. There’s a risk that the customer thinks she’s had proper financial advice when she hasn’t.

Other advantages include transparency – investors can quickly find out what’s in their portfolios – and rebalancing. That means that if your portfolio starts out with 10% exposure to US stocks, and then US share prices rise much more quickly than other assets, some of your US shares will be sold to take the overall US exposure back down to 10%. If you don’t rebalance your portfolio, your risk level can increase because your exposure to a particular asset class or region can become too large.

The other issue with robo advice is the fees. Most robo sites keep their costs down by using ETFs and other passive funds, but you can definitely save more money by taking the DIY approach, but we’ve already seen the potential downsides to that approach.

Leading robo advice sites

Let’s now look at some of the leading UK robo advice sites. This list is not exhaustive, new sites are being launched all the time. As more of the traditional financial services companies launch their own robo services, the number may well rise further. First, here’s a table comparing the different fee structures:

Platform Fees Minimum investment
Nutmeg Up to £100K: 0.45%/0.75%
£100k+ 0.25%/0.35%
£500 + £100 a month
Wealthsimple 0.7% (up to £5000 is managed for free for first year) Zero
Wealthify £1+ 0.7%
£15k+ 0.6%
£50k+ 0.5%
Moneyfarm 0 to £20k: 0.7%
£20k to £100k: 0.6%
£100k-£500k: 0.5%
£500k+ 0.4%
Scalable Capital 0.75% £10,000
Evestor 0.35% Zero
IG Smart Portfolio* Up to £50k: 0.65%
£50k to £250k: 0.35%
£250k: 0.1%
ETFmatic Up to £25k: 0.5%

1. Nutmeg
In addition to the above fees, you’ll also have to pay fees for the underlying investments in your portfolio, which are normally ETFs. ETF charges often work out at around 0.13% on average. When the portfolio buys or sells the ETFs, there’s a cost arising from the bid/offer spread.

Nutmeg was the first robo advice platform in the UK, and offers two different services: ‘fully managed portfolios’ and ‘fixed allocation portfolios’. If you look at the charges in the above table, the fixed allocation portfolios are cheaper.

With the fully managed portfolios, the Nutmeg team can move in and make ‘strategic interventions’ when they see fit. For example, in the run-up to the Brexit referendum, the fully managed portfolios were no longer invested in UK small-cap stocks. There are ten possible portfolios within this service, you’re allocated a portfolio once you’ve answered the questionnaire.

The fixed allocation portfolios are designed by the Nutmeg team and are automatically rebalanced to stay in line with the chosen risk level. Apart from that, the team keep their hands off their portfolios. There are only five available portfolios within this service.

  1. Wealthsimple

Wealthsimple is a Canadian firm that launched in the UK in September 2017.

The firm constructs a range of portfolios made up of ETFs which are then assigned to customers depending on their risk profile Users can easily see how their portfolio is performing and drill down into the performance of the different assets.

  1. Wealthify

With its low minimum investment, Wealthify is aimed at the broad general market. Earlier this month, insurance giant Aviva bought a majority stake in the platform. This deal should give Wealthify the cash to become a major player in this market.

  1. Moneyfarm

Moneyfarm was originally an Italian business but launched in the UK in 2016. It already has more than 10,000 customers in the UK.

  1. Scalable Capital

Scalable has higher charges than most of its rivals but perhaps can justify those higher fees with a particularly sophisticated investment process. You can read more about it here.

  1. Evestor

This service launched this year and is co-founded by Duncan Cameron, one of the original founders of MoneySupermarket.

Unlike most of its rlvals, it offers fully regulated financial advice, which should take account of all your circumstances and goals. You can speak to evestor’s financial advisers whenever you want. That said, the company’s advisers are only going to recommend you solutions from a limited range of products.

7. ETFmatic

ETFmatic makes a big play of being a european player and operates across 32 countries. Its fees are on the low side; the 0.3% fee for holdings above ¬£25,000 is especially attractive. Although the service is a discretionary investment model, it does give the user more input than many rivals. That’s because there are three types of portfolio for the user: starter portfolios, investment plans and custom portfolios.

The starter is the simplest offering – ETFmatic sets the asset allocation across bonds and equities according to your attitude to risk. The custom portfolios are similar but you set the initial allocation percentages, such as 20% in bonds or whatever. With the investment model, the asset allocation is constantly being updated by ETFmatic according to what’s happening in markets at the time.

8. IG Smart Portfolio

IG is one of several bigger financial services companies moving into the robo advice arena. You can reduce your fees for Smart Portfolio by trading regularly on IG’s spread betting or stockbroking services.

What next?

No doubt we’ll see more big players enter this market, and some of the smaller players may be forced out.

Much as I like ETFs, it might be interesting if some robo players started to invest in some active funds or other options. The performance of the portfolios will be crucial too. I think it’s too early to start making any definitive judgements on the performance of these services, but in the long-term that will be crucial. We’ll just have to wait and see‚Ķ

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