Robo advisers are starting to make inroads into the financial services industry, but what are they, and are they suitable for all investors?
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Robo-advice is what it says – a software algorithm that asks a few questions about you and your finances and picks a suitable basket of investments that match your attitude to risk.
The attractions for many investors are hands-off portfolio management and cheap fees.
Here, iExpats looks at how robo-advice works, the advantages for investors, and the pitfalls.
How Robo-Advice Works
Robo-advice is dished out by a complicated software program designed by financial advisers, investment managers and data scientists.
The program includes sophisticated algorithms and mathematical models designed to profile you as an investor to match you to a set of investments.
Investors can access their robo-accounts with a smartphone, tablet or laptop.
In simple terms, the robo-adviser scores your answers to questions like how much you earn, your financial goals and how much risk you are ready to bear.
Your score determines the ready-made portfolio the software recommends.
For example, if you are saving for retirement, AI (artificial intelligence) might recommend stocks or funds suitable for long-term growth.
Most robo-advisers work the same way:
- The AI quizzes you about your financial status to determine goals and risk attitude
- The AI then allocates a portfolio based on your responses
- You find your investment with a lump sum or monthly payments
- The AI monitors portfolio performance by rebalancing the portfolio with regular reviews
Robo-Advice Pros And Cons
Robo-advisors are growing in popularity with some features investors love – and some they hate.
Here are some of the common likes and gripes:
Low-cost alternative
Because robo-advice lacks the human touch, charges are typically much lower than those posted by traditional advice firms offering face-to-face consultations. Expect robo-advice costs to run at a flat fee of around 0.2 per cent to 0.5 per cent of your portfolio value, compared with one to two per cent for a human adviser.
24/7 availability
Providing you have internet access, you should have control of your robo-advice account from anywhere. Check your portfolio and manage your account on demand without having to make appointments or stick to an adviser’s working hours.
One-stop solution
Most robo apps and websites are intuitive, easy to use and need little technical skill to navigate.
Faster and smarter investing
Robo-advisors can immediately carry out changes, whereas human advisers can take days or weeks to do the same job.
Fewer financial obstacles
Most robo-advice apps have a much lower cost of entry than investing with a human adviser. Many allow investments of as low as £50 a month, compared with £100 or more with an IFA firm.
Lack of bias
As a software program, robo-advice has no bad attitudes, political leaning or in-built bias.
No human touch
If the markets bomb or you have concerns over your investments, the options are limited as there is no human at the other end of a telephone and no way of building a long-term relationship with a machine.
Limited fund options
To keep costs down, many robo-advisers offer a limited range of funds. If you want a huge choice, you are probably better with an investment platform account with a platform like AJ Bell or Hargreaves Lansdown.
Who Benefits From Robo-Advice?
Robo-advisers are not set to take over the world of financial services, but they do aim for a specific type of customer.
The automated service is right for investors with comparatively low amounts to put aside, want an easy way to invest and who intend to leave their money invested for the long-term.
Choosing A Robo-Adviser
If you are looking for robo-advice, you are probably tech savvy and more interested in usability.
The first test for a robo app is how easy is connecting a bank account so you can start investing?
Most robo apps offer diversified portfolios of low-cost ETFs. Because the funds within robo apps are similar, so is their performance, so low costs are more important than investment yield.
Expats should also note that there’s no universal robo advice app and the app is supervised by the regulator in the country where the firm is based. Check out the t’s and c’s as your tax rules are governed by those in the place where you live.
The length of time your investment has to grow and the how much risk of losing money you are ready to accept are important factors in your robo-adviser profile.
You may want to opt for a higher risk preference if investing over the long term – that’s ten years or longer. The time frame allows your portfolio to recover from any shocks and invests in higher risk stocks rather than safer cash or bonds.
Short-term investors should look for low-risk funds as their portfolio is less able to withstand too much volatility.
How Do Robo-Advisers Perform?
The rule of thumb is performance depends on your investor profile and how you answered the initial setup questions.
If you opted high, your portfolio will do great when the stock markets are booming but less well should the markets bomb.
Despite the COVID-19 pandemic and the Russo-Ukraine War, the best UK high-risk bots have added between 20 and 27 per cent of value. Meanwhile, middle risk portfolios grew by around 15 per cent and low risk by two to five per cent.
Expat Guide To Robo-Advice FAQ
Why doesn’t my robo-adviser respond to daily market changes?
Unlike human fund managers, robo-advisers are programmed to respond to the maths in their algorithms rather than external factors. A robo-adviser will make a non-emotional decision about the fund you are in.
Research by US fund manager Fidelity showed the best performing portfolios they manage were those owned by dead or inactive clients as they tampered with their portfolios the least.
Which robo-advisers accept expats?
The robo-adviser choices are limited for British expats. Only Nutmeg and Netwealth are open to Brits living anywhere in the world.
What are the alternatives to robo-advice?
Robo-advisors are efficient but probably don’t do anymore than a keen DIY investor. The decision whether to use robo-advice comes down to how much time you have to devote to managing your portfolio.
Depending on your level of investment, alternatives to robo-advice include:
- Managing your portfolio personally
- Taking direct advice from an IFA
- A savings account rather than investing
- Investing in an ISA
How many funds should you invest in?
How many funds you invest in is up to you, but keeping track of all that data is a pain. Rather than look at the highest number, look to the least number of funds you need for a balanced, diversified portfolio.
And that’s just three – UK and international stock market funds and a bond fund.
The danger of having lots of funds is the charges can pile up. The more specialist the fund, the higher the fees and commissions.
Can robo-advisers lose investors money?
Yes, investors can lose money by following robo-advice. Inflation, market falls and other events like the COVID-19 pandemic can lead to the value of your portfolio falling.
How much do I need to open a robo-advice account?
Expat investors need £50,000 to open a Netwealth account
Nutmeg does not offer accounts to expats who are non-UK resident, but may allow investors to keep their accounts if they move abroad. Minimum investment is £500 in a general investment account.
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