Investments 101: What is a robo-adviser?

Lately, there’s been a lot of investor attention surrounding robo-advisers. This is especially true over in the States and the concept is just taking off here in the UK. We’re seeing more and more of these platforms and some of the UK’s biggest banks are now planning to launch robo-advisers for their existing clientele. So what is a robo-adviser and, if you’re interested in your finances, are they worth looking into?

Firstly, what are robo-advisers?

Simply put, a robo-adviser is an online platform that allows you to invest your money across different asset classes. An asset class refers to a group of securities that have the same kind of characteristics. For example, stocks (or different types of equity), your fixed income and other cash equivalents. Robo-advisers are based on algorithms and are fully automated to provide those who use them with solid investments strategies.

Are robo-advisers for you?

To use a robo-adviser the usual method is to take an online questionnaire that will assess your attitude to risk. Then, a professional team of financial experts will build an investment portfolio for you and your needs. They will take into account your current situation and assess your incoming and outgoing finances in order to make informed recommendations.

How are decisions made?

Robo-advises are able to make such recommendations by using the Modern Portfolio Theory. This is a universal method of aiding financial decision making. The Modern Portfolio Theory is essentially a financial hypothesis that maximises the return of someone’s portfolio (i.e. your assets), based on the amount of risk to those assets.

Robo-advisers vs financial advisers

There hasn’t always been a massive amount of choice for people looking to invest. Historically, it has been very limited, usually to DIY investing – for example, buying shares directly in the market and then hiring a financial adviser to help. But financial advisers normally ask for a minimum level of investable assets before they are willing to work on a portfolio – a minimum that not everyone who is interested in investments will have. Secondly, financial advisers can be expensive to use – and not everyone can afford one. As a ballpark, they take 1-2% of your annual investment.

2 robo-advisers worth looking into

They are a number of robo-advisers out there but if we were to narrow it down, these are the two currently worth looking into.

Nutmeg

  • Minimum investment: £500. If you're investing below £5,000 we require you to set-up a recurring contribution of at least £100 per month to grow your account.
  • Fee: starts at 0.95%/yr and goes down to 0.3%/yr, including VAT, depending on the amount you invest.

 Scalable Capital

  • Minimum investment: £5,000.
  • Fee: 0.75% + on average 0.25% for cost of the ETFs.

You can discover the top 6 robo-advisers here from AdvisoryHQ.

Pros of using a robo-adviser

✅ They are fully automated. This means there’s no face-to-face interaction with an adviser and enrolment is also automated.

✅ Advice is low cost.

✅ It’s an easy way to start investing – plus you’ll be exposed to different markets very quickly.

✅ Set up is quick and easy.

What to bear in mind

❌ While it’s great that robo-advisers are fully automated and will always try to define and protect, remember that they don’t actually know you! The information they receive on you is very much face value. There are no emotional ties or considerations. For example, it won’t know that you’re trying to change jobs, or maybe you’re thinking of starting a family or buying a house. Tip: Adapt your investment strategy based on your personal situation. Numbers don’t tell your life story!

❌  When investing, make sure you understand the market and its various fluctuations – but, most of all, how they’ll affect you. A robo-adviser unfortunately won’t call you to tell you of these changes!