What is robo investing?

Is robo advice the right investment option for you?

There are a number of ways to approach investing and using a robo advisor is one of them.

But what is a robo advisor and how does it work? Below, I’ll explain everything you need to know.

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Here at Be Clever With Your Cash, we’re not regulated to give you financial advice. We aim to give you the facts about a provider or investment but it’s up to you to decide if it’s suitable for you. If you’re looking for more personalised guidance, find a financial adviser who can give you specific advice. Remember that your capital is at risk when investing — don’t invest more than you are prepared to lose. 

How does a robo advisor work?

A robo advisor is a digital platform that automates and simplifies your investing for you. Using some basic information, such as your salary, attitude to risk and financial situation, it then recommends where you should invest your money. This is usually in one of its pre-built portfolios. These will include a range of investments depending on the information you’ve given. 

A robo advisor may also take into account how much you can invest, what level of risk you can tolerate, and what you’re investing for. So if you’re trying to grow your money for retirement in the next 20 years, it’ll recommend a different set of investments compared to if your goal was more medium term, like paying off your mortgage.

Now while it’s called a robo advisor, it’s not completely human-free. There will be people behind the scenes, although your interaction is usually limited, and the recommendations are only guidance – you actually have to make the end decision. 

So you’ll not be getting anywhere near the bespoke, human service you’d get from a real life financial advisor who can be a lot more holistic, carefully assess your appetite to take risk and give you personalised advice, including how to be more tax efficient.

Once your portfolio is set up, all you’ve got to do is add cash and then the platform will invest it for you. Based on the information you’ve given it, the platform will keep an eye on your portfolio and will tweak it by buying and selling investments, to help you reach your financial goals. 

What does a robo advisor cost?

One of the main draws of a robo advisor is they tend to be cheaper compared to other investment options, like using a stockbroker to put together an actively managed portfolio or a financial advisor. You’ll usually have to pay a fee to use the platform which is typically a percentage of the money you’re investing. So the more cash you invest, the higher the fee. 

You can expect to pay a platform fee of between 0.25% and 0.75% of your investment, whereas a financial advisor could charge you 1% or more.

Other fees also apply when using a robo advisor. For example, when your money is invested, you’ll likely have to pay a fund charge. This is taken by the fund provider, for example, Vanguard. Market spread is another cost that comes from buying and selling investments, which you’ll also have to pay.

Say you had £1,000 to invest. Robo advisor Wealthify charges a 0.6% management fee and suggests the investment costs would be around 0.17%. So on your investment you’d pay 63p a month, or £7.60 in a year.

On the same £1,000 investment, another robo advisor Moneyfarm charges a 0.45% management fee and suggests 0.17% investment fees (fund fees 0.15% and market spread 0.02%), costing you 52p a month or £6.20 a year.

What are the pros of a robo advisor?

As well as being low-cost, robo advisors offer an easy way to get started with investing.

You don’t need loads of money – some providers allow you to start a Stocks and Shares ISA or General Investing Account with as little as £1 – and most of the investment decisions are made for you. You don’t need to buy or sell investments or react to short-term market changes – the platform will manage your investments day-to-day. 

So they’re good for beginner investors, for those who aren’t that confident making investing decisions or people who want simplicity.

Another good thing about robo advisors is they give you a portfolio that includes a wide spread of investments. The portfolio will depend on the level of risk you’re comfortable with, but it’ll offer decent diversification. 

Diversification is what you want in investing as it means the risk will be spread across different markets, industries and geographical locations. The idea is if one area of the market falls, investments that perform better in other areas mean it won’t hurt your portfolio too badly. 

What are the cons of a robo advisor?

As robo advisors are automated and use technology instead of a real advisor, don’t expect a bespoke portfolio created specifically for your circumstances. Yes, some do gather information from you via a questionnaire to signpost you to their most suitable investments, but it’ll be broad brush, rather than tailored exactly for you, and may not totally meet your needs. In short, it’s limited to what it can offer you.

You may not be able to make any changes to your portfolio either – although some robo advisors do give you that option.

Robo advisors are usually app-only, which may not be suitable for everyone, especially those who want more interaction with real people or more tangible ways to manage their investments. Although some do offer phone access to investment consultants if you get stuck, or the option to pay more money to access a financial adviser.

Some apps may be limited in terms of their portfolio options and one of the biggest concerns, according to Bangor University, is how having such easy access to advanced investment tools may lead some people to ‘overestimate their abilities and take too many financial risks.’ The algorithms used by robo advisors aren’t always clear, which the university says could make it difficult for some investors to fully understand the potential risks involved.

You might also prefer passive investing via an index fund or Exchange Traded Fund (ETF). This is a relatively low-cost and straight forward approach to investing that doesn’t require loads of money or investing experience. 

Is my money safe with a robo advisor?

Yes it is – as long as you choose a platform that’s authorised by the Prudential Regulation Authority or the Financial Conduct Authority and your investment is regulated. 

It means up to £85,000 of your investments will be protected by the Financial Services Compensation Scheme (FCSC) per provider, if the service itself fails. For example, if the company goes bust.

What this doesn’t cover is if your investments make a loss. With any investment there is a risk of losing money and you may end up with less than you started with.

With regulated firms, you’ll also be able to take your complaints to the Financial Ombudsman Service, which handles disputes between customers and financial firms.

If you’re not sure if your robo advisor is authorised, you can search for it on the FCA’s Financial Services Register and you can also check your investment’s protection on the FSCS website.

Robo advisor v DIY investing

A robo advisor bridges the gap between DIY investing and managed portfolios, and while you’re more restricted with choice than if you were to invest alone, it can take some of the work out of it.

We explain more about DIY investing here, but essentially you can still do it yourself without spending loads of time learning about investing and picking individual stocks. Instead, you can opt for a passive investment, like an index fund, and pay in small sums over time – and that’s about it. 

Should I use a robo advisor?

As I said earlier on, if you’re new to investing or not particularly confident, robo advisor platforms can help ease you into your investing journey. Yes, they offer a much more basic service than going to see a financial advisor or creating your own bespoke portfolio yourself, but that’s the name of the game – and it’s reflected in the cost. 

If you’re just starting out and don’t have particularly complicated investing goals, then robo advisors are worth exploring. You can dip your toe in and invest with small sums and let the platform manage your investments while you try to learn more about investing as you go.