We already rely on robots and automated services when it comes to picking and delivering our shopping or online banking. The robots are now also taking over the investment world. Rather than images of the Terminator bursting into fund manager offices warning them to “invest with me if you want to live,” robo advisors are providing a low cost and flexible alternative that sits between DIY investors and traditional financial advice.
There are a few choices when it comes to investing:
DIY. You could pick your own funds and shares as a DIY investor. This would mean researching stocks or funds to put your money in through an investment platform, diversifying and monitoring performance to ensure your portfolio performs according to your goals.
Use a professional. A financial adviser may offer their own discretionary fund management service or work with an investment committee that selects funds for clients based on what they are looking to achieve. An adviser would assess factors such as your age, risk appetite and reasons for investing and help find the most suitable financial products and funds for you. Once set up, an adviser and their partners can help regularly monitor and tell you about your portfolio’s performance and how it fits with your plans as well as if any changes are needed.
Both of the above have costs. You pay a platform and fund management fees as a DIY investor. Using a financial adviser adds another layer of costs as they may charge initial and ongoing advice fees.
This brings in number 3, a middle ground, which is a robo advisor.
What is a robo advisor?
A robo advisor is where you choose a ready-made portfolio, and all monitoring and management is dealt with on your behalf, sometimes robotically.
Your money is put into model portfolios based on your attitude to risk and the underlying funds are typically passive funds such as trackers or exchange-traded funds which follow certain markets.
This helps robo advisors offer costs that can be lower than using a financial adviser but you still get access to professional fund selection and ongoing monitoring.
The whole robo-advice process is conducted online. You sign up with an email and password. Sometimes you’ll then be asked to complete a questionnaire that assesses your attitude to risk.
There may be questions or statements you have to show how much you agree with such as “I am willing to make a short-term loss for the chance of a long-term gain” or “I am comfortable with seeing my portfolio decline after a few months.” You will usually be given a rating, either between 1 and 10 or “low”, “medium” or “high”, based on your responses.
This will determine the type of funds to put your money in. For example, if you are seen as more cautious, then more of your money could be put in funds backing developed markets rather than more risky emerging economies. With some robo advisors, there’s no quiz, so you’ll simply select the portfolio that you think matches you best.
Your provider might then ask about your investment goals and how much you are willing to invest. Some providers provide graphics or graphs that forecast how long it will take to reach your target. This can help you decide if you need to invest more money.
Similar to using a financial adviser, there will be a human committee behind a robo advisor that decides on how money is allocated to funds in the different portfolios. These are called fund managers, and they’ll rebalance the portfolio depending on the economic climate.
You will still get regular updates and can often monitor performance online or through an app. You may also have to complete regular suitability questionnaires to check that your investment still fits with your goals and if your attitude or financial plan has changed.
How should I choose a robo advisor?
The first step when choosing a robo advisor is to ensure it is regulated. You can check its status on the Financial Services Register.
There are a few ways to decide on which robo advisor to use.
You could go by minimum investment, costs or functionality. Some providers have a minimum deposit of just £1, sometimes they can be a lot higher, going up to £500. Fees are typically less than 1% – if you’re looking to invest a very small amount, such as £50 per month, consider staying away from any flat fee platforms. The fees usually depend on the features available – you can check our reviews of robo adviors to get a breakdown of features and fees of each advisor. Our comparison table below shows some robo advisors you could choose between.
Check what products a robo advisor offers and if it has what you need. Most offer a stocks and shares ISA and general investment account but not all offer pensions, Junior ISAs or Lifetime ISAs.
There is usually no charge to open an account with a robo advisor, but there will be fees to pay once you start investing. You will usually need a minimum amount to start an account and there may be a certain amount you have to contribute each month.
Similar to DIY investment, a robo advisor will also charge an annual platform fee and there will be a cost for the underlying funds.
How to find the best robo advisors
There are several ways to assess the best robo advisor for you.
Cost. Robo advisors will charge a platform fee and also an underlying fund charge. This varies across different brands. There may also be fees to transfer money to and from another provider and to make withdrawals.
Past performance. Check how well a platform’s portfolios have performed. Most will let you see the track record of their risk rated funds over time periods such as 1, 5 or 10 years. Remember, past performance isn’t necessarily an indication of how a portfolio will fare in the future but it can give you an indication of what to expect.
Features. Robo advisors will let you monitor the performance of your portfolio online. But some may offer extras such as an app or tools to forecast how much your pot could be worth in the future based on your current level of investment.
How much does a robo advisor cost?
The fees you pay depend on how much you are investing.
Robo advisor fees tend to be based on a percentage of your portfolio which drops as your investment gets higher. You will need to pay a platform charge as well as an underlying fund fee.
Charges start from around 0.45% for investments worth up to £10,000. That means it would cost £45 per year to invest with a robo advisor charging 0.45%.
Charges can be as low as 0.35% for portfolios worth more than £100,000 on some platforms.
There will also be fund fees to pay.
Common robo advisor features
Risk questionnaires. You will need to answer a series of questions that assess your risk appetite and how comfortable you are with different styles of investing and levels of loss.
Model portfolios. Robo advisors offer portfolios of tracker funds or exchange-traded funds that give you exposure to different markets. They are weighted based on different risk levels with the most cautious following developed markets and the more risky putting money into emerging market economies.
Email updates. Rather than regular meetings with a financial adviser, robo advisors will offer blogs, email updates and videos. These will often explain the performance of the portfolios and any changes in strategy or outlook.
Website and app features. You will be able to log in to your account and track your portfolio’s progress through an app or website. You can also make withdrawals and increase or decrease your investment online from your smartphone or computer and use graphs and tools to forecast what your portfolio could be worth in the future.
Low minimum investment. Financial advisers and fund managers may have high minimum investments of as much as £1,000 or more. In contrast, it can be cheaper to start investing with a robo advisor, with some offering minimum investments from just £100.
What is a ready made portfolio?
Rather than investors choosing their own funds, a ready made portfolio is prepared for them. Thus combines a range of investments, which are mainly passive funds in the case of robo advisors.
The type of funds will depend on the risk rating of the ready made portfolio. Riskier portfolios will hold assets that can have the potential for higher returns such as emerging or alternative markets but also for steep losses.
All the monitoring and rebalancing is managed for you so you just have to decide how much risk you are willing to take and how much money you want to invest.
Do you need a robo advisor or financial adviser?
A robo advisor is ideal if you want to take the hassle out of researching and monitoring an investment portfolio.
A portfolio is made for you based on your attitude to risk and your money is monitored and rebalanced, if necessary, by a platform’s investment committee.
You can usually hold investments in an ISA, pension or general investment account.
These are all things that can also be done with a financial adviser but a robo platform may have lower costs as you aren’t paying for their high street office, mailouts or regular meetings and advice. You need to be tech savvy to use a robo advisor, as most of the set-up and interactions with your portfolio are online.
There can be benefits to using a financial adviser instead. They can help with wider financial planning issues beyond just investments and can ensure you are investing the correct amount in the most appropriate way. An adviser can also be at the end of the phone if you have worries about your portfolio, which isn’t possible with all robo advisors.
Using a financial adviser can also be beneficial if you have more complex financial planning needs such as inheritance tax planning or you are working out how and when to access your pension.
Some robo advisors may also provide financial advice and a review of your financial goals and portfolio for an extra fee.
How to invest with a robo advisor
Set up an account. You will need to register for an account using an email and password. A robo advisor will usually want your name and address and documents such as a passport to conduct identity checks. You will also have to provide your national insurance number if you want to set up an ISA.
Complete a risk questionnaire. One of your first tasks will be to complete a risk questionnaire so the robo advisor can assess your attitude to investing and risk appetite. This will determine the portfolio that your money is put into.
Decide how much you want to invest. Each robo advisor will have its own minimum investment but as long as you meet this, you can choose how much to invest as a lump sum or on a monthly basis.
Choose a product. Once you know the type of portfolio and how much you want to invest, you can choose a product wrapper such as an ISA, general investment account or pension. The type of product will depend on the robo advisor.
Link your bank account. You will need to link a bank account with your robo advice platform so you can send contributions and make withdrawals. This helps prevent fraud as money can usually only be sent to a linked account.
Monitor your investments. Use a robo advisor’s app or website to keep track of your investment and look out for email updates on portfolio performance and strategies.
Can you trust robo advisors?
Like human financial advisers, robo platforms must be regulated by the Financial Conduct Authority (FCA). This means they must commit to treating customers fairly and separating client money from their own. Users benefit from Financial Services Compensation Scheme protection of up to £85,000 of uninvested cash if a provider goes bust.
You can also complain to the Financial Ombudsman Service if things go wrong and you aren’t happy with the way a provider has handled issues you have raised.
Which robo advisor has the best returns?
Returns vary across providers. Most will have a statistics page where you can track the performance of the various portfolios on offer from a robo advisor. You can usually see how portfolios have performed over 1 or 5 years or even by individual time periods.
It can be hard to compare providers directly against each other as their risk rated portfolios may have different assets but it is useful to contrast how they all perform in different markets to spot the best robo advisors.
Past performance isn’t a guarantee of future returns but it does give you a sense of what could happen with your money.
Is a robo advisor better than an index fund?
An index fund simply follows the performance of an index such as the FTSE 100 or S&P 500. It is made up of companies in the index it is tracking and will just replicate their performance. This means if an index goes up, so will the tracker fund. But it also works the other way and a dip in an index will also be reflected in the performance of a tracker.
In contrast, a robo advisor builds a diversified portfolio of different index funds and exchange-traded funds based on an individual’s attitude and appetite for risk. It is also regularly monitored and rebalanced to reflect the economic and political climate, which you don’t get in an index fund.
Isabelle wants to start an ISA but isn't confident about picking her own shares or funds and can't afford the advice fee charged by a financial adviser or the £1,000 minimum investment needed.
Instead, she searches online for a regulated robo advisor where she can set up an account in minutes. Rather than having to wait for an appointment with a financial adviser during working hours, she can complete a risk questionnaire in the evening to determine her investing attitude and the most appropriate portfolio for her money.
She can then start investing from as little as £100 and leave the concerns about rebalancing and monitoring the markets to the robots.
Isabelle is still able to log in and view her portfolio performance and can make withdrawals or invest more from her smartphone or computer as and when she chooses.
* This is a fictional, but realistic, example.
Pros and cons of robo advisors
Pros
Set up an account in minutes
Low cost investment
Monitor performance online
Ready made portfolios are set up and managed for you
Cons
May not be suitable for complex financial planning needs
No guarantee that your responses reflect what is the most suitable product for you
No control over where your money is invested
Need to be tech savvy
Bottom line
A robo advisor provides an effective middle ground between those who aren’t confident about managing their own investments and don’t want to or don’t have enough money to use a financial adviser.
Everything is set up and managed for you online within minutes based on your responses to a risk questionnaire.
This approach can be faster than using a financial adviser and you get access to snazzy websites and apps.
But it isn’t an overall financial planning experience that a human adviser can provide, which may be more beneficial for those with more complex needs.
Frequently asked questions
Robo advisors have to be approved and regulated by the Financial Conduct Authority (FCA).
This means, like banks, investment firms and other financial advisers have to follow rules on treating customers fairly, keeping client money safe and running a prudent business.
Robo advisors are still regulated in the UK but they provide a different type of support than financial advisers.
They offer a simplified form of advice geared towards recommending funds based on your response to a risk questionnaire. That is different to a financial adviser, which is regulated and qualified to advise on a range of issues and may be able to recommend a wider range of products.
The robo element of robo advice refers to the algorithms behind the risk questionnaires and the technology that helps users contribute to and monitor their portfolio online.
There is still plenty of human interaction behind the scenes at a robo platform such as building and rebalancing portfolios and setting investment strategies based on their economic and political outlook.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Marc is an award-winning freelance journalist specialising in business and personal finance. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and Business Insider. He also co-presents the In For A Penny financial planning podcast.
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