The rise of robo-advisors in finance
The increasing prominence of robo-advisers is radically shaking up the world of finance, but what exactly are they? Here at Guarantor Loans, we explain everything you need to know about them and the implications of their rise.
What are robo-advisers?
Robo-advisers are predominately used for online investment, helping investors to make informed decisions when it comes to wealth management. A number of fintech startups have started using robo-advisers as a means of making wealth management far more accessible to the average person. Part of the aim of having robo-advisors is to change preconceived notions that investing is only the preserve of the extremely wealthy. Given that the concepts of robo-advisers in the UK are still fairly new, these startups have done fantastically well. It is thought the leading players in this type of technology have amassed nearly £1.8 billion in assets by December 2017!
Typically, robo-advisers will involve some sort of questionnaire that customers will need to fill out. This helps the robo-adviser to determine where to allocate your assets (usually through algorithms and also with wealth fund managers) and then helps to manage these on your behalf. It is common for these companies to allocate these investment options through exchange-traded funds (ETFs) or invests money into an ISA for stocks and shares.
In most cases, these online investing companies are extremely user-friendly and it is often possible to access and navigate on your mobile.
Questions usually include things such as:
- Your financial history
- What your goals are when it comes to investments
- The amount of risk you are willing to take with these investments, the longer you are willing to take a risk, the more likely it is you will be able to weather financial downturns
What happens next with robo-advisers?
Once these questions have been answered, a number of companies offer the option of being able to access your portfolio online, to manage your assets and to be able to be regularly updated. You can usually choose up to 10 investment portfolios.Some companies, such as eToro give clients the oppportunity of using a ‘practice portfolio’ before setting up a real portfolio. This can be particularly advantageous if you are new to online investing, as it gives you the chance to get to grips with how the process works before investing money into it.
In addition, it is important to note that how you answer in the questionnaire can have quite a big impact on your investments. For example, if you are very risk-averse, this means you are likely to have fewer shares or equities and therefore less potential profit. However, there are clear benefits to both.
Are there fees involved with robo-advisers?
Usually yes. It is important to remember that there are often fees involved when it comes to this service. Most of the time, the fees are under 1% for investments.If they above this amount, seriously assess that it is worth choosing that particular company by weighing up the advantages compared to other companies with lower fees.
Some companies don’t have management fees, but instead, ask for a minimum deposit or a one-off upfront fee when you join.
If you are new to the world of online investing and robo-advisers, here some pointers to guide you:
- Take your time choosing the right online broker for you. As we have previously mentioned, a number of companies have popped up in recent years offering robo-advisers, and it definitely isn’t the case that they all offer the same benefits
- If possible, do try to take advantage of using practice portfolios available with a number of online investment companies. It means you can familiarise yourself with the process without there being any binding investment. After all, you might discover that actually, online investing isn’t your cup of tea
- It may be worth researching for an online broker that doesn’t need a minimum deposit if you are new to online investments. Getting to grips with the process of trading and investing takes time, and you don’t want to be taking too much risk to start with
The most popular robo-advisers
Our guide on robo-advisers may well have piqued your interest in getting involved with online investments. But with so many to choose from, which company do you go with? Look no further, we’ve taken that into consideration too! Here are our picks of the best robo-advisers by online investing companies in the UK:
Moneyfarm charges no management fees on any portfolios less than £10,000 or over the £1 million mark. No minimum deposit is required to sign up for Moneyfarm, however, it is generally advised to start with £1500.
With this app, users of eToro can invest in the stock markets, indices, currencies and commodities. Users also have the option of having a ‘practice portfolio’. As we have previously discussed, trying a practice portfolio is definitely worth doing!
Wealthify asks its customers to define how much risk they are willing to take, then money is invested through the help of algorithms in different assets classes such as Exchange Trading Funds. This helps to determine what is best for investment returns.
Nutmeg was created by former CEO Nick Hungerford. Acting as an online wealth manager it helps to make online investing much more accessible to far more people. With this app, you need a minimum capital of £500 and charges a very low management fee of just 0.3%. The app then makes investment decisions for you, with no exit fees involved if you decide to withdraw money at any point, which is a definite bonus when it comes to online investing. In addition, you also have the opportunity to check out your portfolio online whenever you want, so you can easily keep up to date with what is going on with your investments.
It is also worth noting that Nutmeg is regulated by the Financial Conduct Authority (FCA) as is Wealthify and Moneyfarm. Why is this so important? Well, in the event of something going wrong with the company (such as going bust) your first £50,000 remains safe through the FCA compensation scheme.